Limited (GSKP) has announced the sale of its Vemgal plant in Karnataka to Hetero Labs Ltd for a cash consideration of Rs 1.8 bn. Post discontinuation of Zinetac last , this plant remained unutilized, and GSKP had announced a write-off on it. The company’s recent financial performance was healthy, led by a recovery in its key brands, and products (Fluarix Tetra, Menveo, and Nucala). We expect this trend in recovery in acute therapies to continue in the coming quarters. GSKP’s exposure only to domestic formulations, strong balance sheet, and strong brand equity augurs well. Maintain Add with a revised TP of Rs 1,575/share (earlier: Rs 1,565/share).
Hetero buys Vemgal plant.
GSKP has announced the sale of its plant at Vemgal, Karnataka, to Hetero Labs for a cash consideration of Rs 1.8 bn. The transaction is expected to complete by Sep’21. GSKP intended to use ~60% of the manufacturing capability towards Zinetac (ranitidine); however, after the NDMA impurity issue, GSKP stopped manufacturing and selling the product in Sep’20. This would have led to severe underutilization of the Vemgal plant, which was yet to commercialize. In a prudent decision, GSKP impaired the asset to Rs 6.4 bn in its Dec’20and explored all plant options, including sales.
Post the impairment, the asset’s book value stood at Rs 3.75 bn. Hence, post the transaction, GSKP wouldof Rs 1.95 bn. The transaction would remove unutilized return ratios. Since the company stopped manufacturing Zinetac at its existing plant in Nashik, there is no immediate requirement for a new plant, provision. GSKP may a higher dividend in FY22e to utilize its surplus cash after FCF of Rs 5.4 bn in FY21e and additional cash inflow of Rs 1.8 bn post the transaction.
Outlook for FY22
FY21 estimates would optically appear lower due to Zinetac (ranitidine) sales in the base. However, we expect FY22 togrowth both on the revenue and earnings front. We expect 6.0% revenue and 11.3% PAT CAGR over FY20-FY23e driven by growth in , respiratory, and VMN. Minimal capex requirement would aid the cashflow generation of ~Rs 20 bn over the .
Valuations and risks
We marginally alter estimates to factor in effect from this transaction and maintain Add with a revised TP of Rs 1,575/share based on 40xFY23e earnings. Key risks: addition ofin NLEM, product concentration, and government intervention.