Gland has a robust business, and some risks you need to factor in

ET Intelligence Group: At ₹6,480 crore, Gland Pharma is slated to be the biggest IPO in the Indian pharma sector.

The Hyderabad-based company, owned by Fosun Pharma, is the first Chinese-owned pharma company seeking to list on the Indian bourses. It is a B2B player in the complex injectable space with a profit-sharing model that protects it from market volatility. It exports to 60 countries with 58% of sales coming from the US (where it is among the fastest-growing generic injectables-focused companies) and 18% from India (where it is a B2C player).

Gland has a strong track record of regulatory compliance with no warning letters received from USFDA for any of its seven facilities. The company has a strong balance sheet and a cash pile of ₹1,500 crore to take care of its near term capex requirement, indicating no pressing need to raise funds except for getting a profitable divestment opportunity for its Chinese parent.

In the past five fiscals, the company’s net sales have grown at a CAGR of 18.2% to ₹2,633 crore and net profit by 25% to ₹773 crore. The company has a cash-efficient business model with a 30% return on capital employed with operating profit (Ebitda) margin of 41% (among the best in the Indian pharma industry).

However, all the positives seem to have been built into the valuation. Fosun acquired the company in 2017 at a valuation of $1.1 billion. The IPO values the company at $3.2 billion — a rise of nearly three times in three years. At a PE multiple of 30 based on FY20 earnings, the issue seems to have been fully priced — riding on the hype around pharma stocks — with little room for value creation for long-term investors.

Besides, Chinese ownership also comes with its risks and rewards. the company has plans to expand into building fermentation capabilities in India — an aspect that should help local pharma companies to reduce their dependence on Chinese imports. Thanks to its ownership, Gland Pharma is also able to foray into the China market, the second-largest injectables market in the world.
The company sources 25-30% of its raw materials from China. Any India-China geopolitical tension has the potential to hamper these imports as well as exacerbate the anti-China sentiment that could lend volatility to the Gland stock — an aspect loved by speculators and traders. Notwithstanding the Indian founders and management being Indian, the company will be deemed to be Chinese for all regulatory and financial purposes.

Despite the company's high-performance record, investors should take note of these aspects.