Enhancing Peptide Capacity Will Tap Into Expanding Market For Peptide Therapies

Key Takeaways

• Strategic investments in capital expenditure and peptide capacity aim to boost future revenues, profitability, and operational margins.
  
• Focus on high-value and complex chemistry positions Neuland for higher-margin opportunities and revenue growth from FY '26 onwards.
  
• Neuland Laboratories faces challenges in profitability and growth due to flat revenues, decreased margins, revenue volatility, and external risk factors impacting earnings predictability.

Catalysts

Manufactures and sells active pharmaceutical ingredients (APIs) in India, Europe, the United States, and internationally.

• Neuland Laboratories is investing significantly in capital expenditure, with ₹147 crores invested in the past 9 months, indicating a commitment to balancing growth and profitability, which can lead to increased revenue in the future as new capacities come online.
  
• The company anticipates growth to resume in FY '26, driven by a significant order pipeline and customer demand, potentially leading to higher revenues and improved earnings.
  
• The completion of manufacturing facilities and scaling up of commercial molecules, especially on the CMS side, is expected to contribute to revenue growth from FY '26 onwards, improving operational margins.
  
• Neuland Laboratories is enhancing its peptide capacity with ₹254 crores invested in new facilities, which could tap into the expanding market for peptide therapies, likely boosting future revenues and profitability.
  
• Strategic focus on high-value molecules from innovative companies and expanding expertise in complex chemistry positions Neuland to differentiate itself and capture higher-margin opportunities, potentially improving net margins.

Neuland Laboratories Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Neuland Laboratories's revenue will grow by 25.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.6% today to 25.0% in 3 years time.
• Analysts expect earnings to reach ₹7.6 billion (and earnings per share of ₹591.03) by about March 2028, up from ₹3.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.9x on those 2028 earnings, down from 49.2x today. This future PE is greater than the current PE for the IN Pharmaceuticals industry at 28.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

Neuland Laboratories Future Earnings Per Share Growth

Risks

• Despite a slight increase in total income, Neuland Laboratories' revenue has been relatively flat, which may impact future growth expectations and earnings stability.
  
• The company's EBITDA margin has decreased due to an unfavorable business mix and increased operational expenses, potentially affecting net margins and profitability.
  
• There is an inherent risk of revenue volatility due to the uneven nature of the business and the focus on small-volume products, which may impact financial predictability and earnings.
  
• Although order pipelines are promising, the forecast for FY '25 remains flat, indicating potential challenges in meeting growth targets, which could pose risks to future revenue growth and profitability.
  
• External factors such as performance of individual products, foreign exchange fluctuations, and raw material cost volatility present risks that could negatively impact revenues and net income.

Valuation

• The analysts have a consensus price target of ₹17350.0 for Neuland Laboratories based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹20000.0, and the most bearish reporting a price target of just ₹14700.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹30.5 billion, earnings will come to ₹7.6 billion, and it would be trading on a PE ratio of 38.9x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹11510.7, the analyst price target of ₹17350.0 is 33.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.