Glenmark: Balance sheet improvement can drive re-rating:: Nomura

Visit http://indiaer.blogspot.com/ for complete details �� ��


􀁾 Action
YTD Glenmark has underperformed the BSE Healthcare Index and the Sensex by
14%. We believe the risk-reward is favourable as the US pipeline gains traction,
and we see improvement in the balance sheet. We reiterate our BUY rating and
raise our price target to Rs405, implying upside of 25% from current levels.
􀁡Catalysts
Absence of any further deterioration in the balance sheet, with fall in receivables
and debt levels; ramp up of sales in the US.
Anchor themes
Glenmark’s presence across markets — US, India and emerging markets — makes
it a play on growth opportunities across geographies. In addition, there could be
potential upside from the innovation R&D pipeline.





Balance sheet improvement can
drive re-rating
􀁣 Improvement in balance sheet is key positive
Receivable days as of Sept 2010 decreased to 120 from 138 days at
the start of FY11. Further, debtors over six months have fallen 43%
over the last six months. Securitised receivables have also declined
47% during the period. In addition, a Rs1.35bn increase in gross block
over the past six months indicates a much lower capex run rate than
the Rs3.9bn capex incurred in FY10. We view these developments as
positive and they should somewhat allay investor concerns over the
company's working capital situation and high capital intensity.
􀁤 Top line beats estimates, but negative margin surprise
Revenue growth of 23% during the quarter was ahead of our 14%
estimate. Sequential growth (ex licensing income) of 22% was
encouraging, with robust growth in India and US formulations and the
API business. Despite strong top-line growth, the EBITDA margin
surprisingly fell 273bps y-y. Management attributed the fall to currency
movements, and product and customer mix changes. The company
expects to maintain EBITDA margins at 25%. We look for the margin
to expand in FY12F on the back of 1) higher volumes in RoW and
Europe branded markets, which are currently operating with very low
margins; and 2) limited competition in product launches in the US.
􀁥 Increasing PT to Rs405 on higher valuation multiple
We believe balance sheet improvement should lead to a re-rating in
the stock. We now value the core business at Rs372/sh based on 18x
FY12F (compared to 15x earlier). The R&D business and Zetia
opportunity are valued at Rs21/sh and Rs13/sh, respectively.