Buy Gujarat Themis Biosyn for target price of Rs 909: HDFC Securities

Our Take: Gujarat Themis Biosyn Limited (GTBL) is engaged in manufacturing of APIs namely Rifamycin S and Rifamycin O. The key raw material for GTBL is Rifabutin which is sourced through domestic market. The company has long standing relationship with its suppliers thereby ensuring timely supply of key raw materials. The company’s manufacturing plant is located in Vapi, Dist.- Valsad, Gujarat. Company has installed capacity for manufacturing 10,000 kg per month for Rifamycin S and 6,000 kg per month (Rifamycin O). The average capacity utilisation was between 70-80% in FY22 and that has increased to 90-95% in H1FY23. Company caters to only two customers Lupin (40- 45% of sales) and Optrix Laboratories Private Limited (50-55% of sales). Company has ‘take or pay’ agreement with Optrix Laboratories Private Limited which is renewed annually and has a contract with Lupin for five years. GTBL is trying to add 2 more customers to reduce the client concentration.

Company said that it is working on 10-12 new products in the areas such as Cardiac, Anti-Infectives etc. and it would be by way of fermentation process only. Company is planning to establish a new R&D lab to take care of technology development for new products and for examining whether existing products can be used for more applications. GTBL is in process of identifying new products which have good domestic and export potential. It is working on strategy to move up the value chain by way of forward integration into API. New facilities would be compliant with strict regulatory authority likes EDQM and US FDA etc.

GTBL is implementing capital expenditure of about Rs 200cr. It would be for i) a new R&D Lab ii) increase fermentation capacity and iii) API block. Fermentation capacity could come on stream in H1FY25. It would have three blocks and would be commissioned in a phased manner. The capex would largely be through internal accruals and in a phased manner. Management said that payback period for new capex could be 3-4 years. Company is setting up API unit with an outlay of ~Rs 40cr. It will cater to regulated markets, EM and RoW markets. It is likely to come on stream by the end of FY24. In the new products, margins could be slightly on a lower side, however there won’t be significant impact on margins.

Valuation & Recommendation: Prior to FY20, company was engaged in contract manufacturing of Rifamycin S for Lupin. During FY20, management decided to change business model from contract manufacturing to manufacturing and sales model; as a result the company’s operating profitability has significantly improved. Company had reported robust numbers over FY20-22.

We expect the company to benefit from ramp up of new products post large capital expenditure. Management aims to start revenue from export markets mostly from FY25E. It has identified new products, for both the markets. We estimate revenue, EBITDA, and PAT CAGR of 29%/28%/27% over FY22-25E. Operating margin is expected to remain at around 49-50% over the next 2-3 years as the company focuses on products, which has limited competition. We feel investors can buy Gujarat Themis Biosyn in the band of Rs 774-787 and add more on declines to Rs 682 (12x Sep-24E EPS) for base case target of Rs 852 (15x Sep-24E EPS) and bull case target of Rs 909 (16x Sep-24E EPS) over the next 2-3 quarters.