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Gland Pharma’s prospects after dismal earnings fail to impress investors

Analysts are also concerned about the lack of optimism in the management's commentary on margins improving.

May 24, 2023 / 05:53 PM IST
Representative Image

Representative Image

Gland Pharma shares took a beating on the bourses in the aftermath of a dismal earnings show, but later recovered to retrace some of the losses.

The stock nosedived over 33 percent over two sessions on the BSE – 20 percent on May 19 and 16.55 percent on May 22 – after its announcing its results as investors stared at the company's deepening losses in the fourth-quarter. The selloff was so intense that the stock dropped to a 52-week low of Rs 861 on May 22.

Gland Pharma’s net profit plunged 72 percent in the fourth quarter, while revenue declined 29 percent, the company, which makes generic injectables, said on May 18.

Some buying in the stock seeped in at the lower levels, helping the price to rise just over 5 percent on May 23, suggesting the worst might be over. However, analysts begged to differ.

They saw the recovery as a dead cat bounce, a technical term used to refer to a transient and brief resurgence in price following a prolonged decline or bear market, only to be followed by a resumption of the downward trend. In many cases, the drop in asset prices is interrupted by short periods of recovery or small rallies, during which prices rise temporarily.

Here's a brief look at the reasons that triggered the fall:

Financials slump

Gland Pharma’s fourth-quarter net profit plunged to Rs 78.6 crore from about Rs 286 crore a year earlier, fuelled primarily by a drag in the top line and weaker operational performance.

Revenue declined to Rs 785 crore due to a high base effect on account of exceptional sales related to the pandemic a year earlier, the bankruptcy of a major client that resulted in loss of orders, and a temporary production shutdown at the Pashamylaram Penems facility in Hyderabad for an upgrade.

Also Read: Gland Pharma shares rebound with 10% rally after 5-day losing streak

Additionally, demand softened in countries other than India and its core markets of the US, Europe, Canada, Australia and New Zealand, leading to reduced sales. The US, Europe, Canada, Australia and New Zealand accounted for 70 percent of revenue during Q4.

The company’s revenue from its domestic business-to-consumer division fell.

The EBITDA margin narrowed sharply to 21.5 percent in January-March from 31.6 percent a year earlier. On a sequential basis, this was the fourth straight quarter of a contraction in the bottom line.

Bleak future

The biggest worry among analysts was the lack of optimism in the management's commentary on margins improving.

Vineet Gala, founder of Xylem Investment Managers, highlighted the sharp margin contraction for the drugmaker.

“The management commentary also didn't seem very hopeful on the margin front. So I get a sense that margins will not return to normalcy any time soon and hence will remain an overhang on the stock," Gala said.

Analysts at Elara Capital said the management's failure to provide clear visibility on stabilisation of operations and improvement is a growing concern. The consistent decline in revenue through FY23, even in quarters with a lower base, adds to the uncertainty, given the increasing worries that the impact of product price erosion in the US and loss of certain customers is not yet fully reflected, they said.

Gland Pharma makes generic injectables and works mainly on a business-to-business model. It ties up with other pharma companies on an expense and profit-sharing model, entering into long-term development, medicine licensing, manufacturing and supply agreements.

Given the B2B nature of Gland Pharma's business, the failure of the management to soothe investor concerns with regard to the loss of clients seems to be another dampener, according to the analysts.

Technical charts

Apart from fundamental concerns regarding the company, the technical charts of Gland Pharma’s stock also paint a similar picture. The stock has lost over 67 percent in the past one year, having closed 0.5 percent lower at Rs 935.50 on the BSE on May 24.

According to Viraj Vyas, a technical and derivative analyst at Ashika Stock Broking, the stock has slipped into an oversold zone, which made way for some pullback. However, he anticipates that the weak momentum in the stock will stay for a prolonged period, going by the technical charts.

“Some strength can be seen in the stock if it crosses levels of around Rs 1,125-1,150. However, that seems very unlikely,” Vyas said, suggesting that investors keep out of the counter.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.​​​​​​​​​​​​​​​​​

Vaibhavi Ranjan
first published: May 24, 2023 05:52 pm

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