Tag - margin pressure

Container unavailability is a serious challenge going forward- Vinati Organics


Update on the Indian Equity Market:

On Wednesday, NIFTY50 ended in green at 16,345 (+2%). Among the sectoral indices, MEDIA(+4%), REALTY(+2.9%), and AUTO (+2.8%) were the top gainers, whereas METAL (-0.4%), was the only loser. Among the stocks, ASIANPAINT (+6%), RELIANCE (+5.5%), and BAJFINANCE (+5%) were the top gainers while SHREECEM (-2.6%), ONGC (-2.5%), and POWERGRID (-2%) led the losers.

Excerpts of an interview with Ms. Vinati Saraf Mutreja, MD, Vinati Organics (VINATIORGA) with CNBCTV18 on 8th March 2022:

  • Raw materials come from refineries and are crude dependent. As crude prices increase, VINATIORGA’s raw material prices will also increase. It has a pass-through clause for most of its products as they have formula-based pricing and can pass on these raw material price hikes to its customers to a certain extent.
  • Exporters like VINATIORGA are facing logistical issues like the unavailability of containers and this is expected to be a serious challenge going forward.
  • On a positive note, VINATIORGA is witnessing good demand. Its main product Acrylamide Tertiary-butyl Sulfonic acid (ATBS) which is used in oil and gas and oil drilling is witnessing positive demand from North America and Europe.
  • Ibuprofen which was very slow last year has started picking up. Butyl Phenol is also experiencing a breakthrough in the market.
  • Ms. Mutreja expects the EBITDA margins to be maintained between 28-30%. EBITDA per kilogram remains more or less constant because of the formula pricing. It sometimes does not necessarily capture some of the fixed expenses like utility costs, fuel costs, overheads, and general inflation. These expenses get hedged as capacities get expanded and utilization levels improve owing to better demand.
  • VINATIORGA saw very high logistics costs in CY21 which eventually started tapering down by Dec-21-Jan 22. After the Russia-Ukraine war started in February, the costs have gone up again. Obtaining bookings and container availability has become a challenge for the entire industry, especially in North America, Europe, and Southeast Asia.
  • Costs have gone up 20-30% for US and Europe bookings in Jan-Feb 22.
  • VINATIORGA is foraying into the production of niche chemicals through Veeral Organics (a subsidiary) at a total capex of Rs 2,500 mn. It involves different products one of which has application in the fragrance industry, one is used as a polymer additive, one is used in the pharmaceutical industry. This is a greenfield project and is expected to be completed in 15 months. Total revenue of Rs 3,000 mn is expected from this project.
  • Veeral Additives is another project which is a merger with VINATIORGA. It is subject to NCLT approval which is causing some delay. This anti-oxidants plant which is used in resins and plastics is expected to come on stream later in March-22.

Asset Multiplier Comments

  • Earlier, customers had stocked Ibuprofen due to Covid-19 related concerns. Due to the lower-than-expected consumption and higher inventory, demand for IBB has also reduced. The demand for IBB may pick up again from March 2022.
  • The new capex for Veeral Organics involves the manufacturing of five new products. The company may target 10% of the total market size of Rs 25 bn.
  • The headwinds of high raw material costs and higher logistic costs may keep the company’s margins under pressure for the next 2 quarters. We expect the EBITDA margins to normalize back to around 30% level by September 2022. 

Consensus Estimate: (Source: Marketscreener and Investing.com websites)

  • The closing price of Vinati Organics was ₹ 1,858/- as of 08-March-2022. It traded at 58x/42x/33x the consensus earnings estimate of ₹ 32/44/56 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 2,052/- implies a P/E multiple of 36x on FY24E EPS estimate of ₹ 56/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Expect to launch Spiriva in 2HCY22 in the US – Lupin

Update on the Indian Equity Market:

On Monday, NIFTY50 ended in the red amid a broad-based sell-off, ahead of the RBI monetary policy meeting during the week. NIFTY50 ended at 17,214 (-1.7%), dragged by TATACONSUM (-3.9%), LT (-3.6%), and HDFCBANK (-3.5%). POWERGRID (+1.9%), ONGC (+1.3%), and TATASTEEL (+0.7%) led the gainers.

Among the sectoral indices, PSU BANK (+0.9%) was the only one to close in the green. FINANCIAL SERVICES (-2.6%), FINANCIAL SERVICES 25/50 (-2.5%), and PRIVATE BANK (-2.3%) led the laggards.

Lupin announced 3QFY22 results, which were lower than the street estimates. Ms. Vinita Gupta, the CEO, outlined the reasons for the lower revenue growth in Business Standard on 7th February 2022:

  • Respiratory products have become a major growth driver for Lupin in the US. Albuterol has ramped up well over the last few quarters and has a market share of over 20 percent. In Brovana, Lupin has about 45 percent market share. The rest of the business in the US has been stable.
  • In 2HCY22 the company expects to launch a few products such as Spiriva in the US. It also expects to launch the first biosimilar, Pegfilgrastim in the US for which US FDA inspection of the Pune plant is required.
  • The company has shifted production to India for some of its products such as nasal sprays. For some other first-to-file (FTF) products in the US, Lupin is transferring production to some contract manufacturers in India and the US.
  • In 3QFY22, the India business was up 12% YoY due to significant growth in the respiratory products portfolio in 3QFY21. The company launched molnupiravir in the Covid products portfolio. Practicing physicians see molnupiravir as an important part of the regimen.
  • The CEO foresees increasing contribution to the Indian business from the diagnostic business. Lupin has established a national laboratory and has seven centers (clinics) in place- four owned and three are partnered. In FY23, she expects a rapid expansion in both owned and partnered clinics. However, the diagnostic business will be small in the near term in terms of total India business.
  • It has recently announced a partnership with Fancoo for CNS products in China. Lupin is looking forward to getting those products approved and launched in China. It is also working on the respiratory and inhalation pipeline (products developed for the US) which provides an opportunity in China.
  • Apart from the US, Lupin is present in the UK, Canada, Australia. It has a presence in Japan through its partner and is working on more partnerships to have a pipeline of complex generics and biosimilars.
  • In Europe, Lupin is focusing on Germany, the UK, and France and has a big respiratory pipeline in Europe.
  • In Australia, it has acquired Southern Cross Pharma which will make Lupin among the top three generic players in the market.
  • About 25% of the raw materials are imported. The company is self-sufficient in terms of APIs and other materials. The company is trying to reduce the dependence on China by increasing suppliers in India. The CEO believes the PLI scheme will help to develop a more self-reliant supply chain.

 Asset Multiplier comments:

  • The entire pharmaceutical industry is impacted due to supply chain bottlenecks which are impacting margins. Reduced dependency on China, and building domestic capabilities are likely to aid margin recovery in the medium term.
  • Lupin’s 3QFY22 performance was impacted by higher price erosion in the US and raw material cost. While this is expected to impact the performance in the near term, the early launch of key products such as Spiriva is likely to provide some relief to investors.

Consensus Estimate: (Source: Market Screener website)

  • The closing price of LUPIN was ₹ 804/- as of 7-February-2022.  It traded at 21x/ 16x the consensus EPS estimate of ₹ 38.6/ 50.2/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 977/- which implies a PE multiple of 19x on FY24E EPS of 50.2/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”