Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Glenmark------------------------------------------------------------------------ Maintain OUTPERFORM
Balance sheet improvement critical for rerating
● We assume coverage of Glenmark with an OUTPERFORM and a
target price of Rs360 (versus Rs390 earlier). We expect a strong
EBITDA growth of 26% over FY11-13 in the base business, driven
by a balanced mix of profit growth across geographies.
● The current market price assigns no value to the R&D pipeline, as
these molecules are still in phase I and phase II. However, the
milestone payments associated with the out-licensing of these
molecules are material and could surprise positively.
● Glenmark trades below the sector average due to its low RoCE
and stretched balance sheet. Margins have been subdued in 9M
FY11, but we expect margins to recover in FY12, as some of the
niche products are launched in the US and Latin America turns
EBITDA positive. Balance sheet did improve significantly in 2Q11,
but as more improvement is visible, the stock should rerate.
● We value Glenmark at 18x FY12E earnings to value the base
business at Rs336/share. Additionally, the value of its FTF
pipeline is Rs24/share in our target price of Rs360. We cut our
forward estimates (FY12/13 by 17/8%), as we remove the Tarka
upside from our model.
Balanced mix of profit growth
If we split the incremental sales and EBITDA growth for Glenmark for
FY12 and FY13, we observe that the growth profile (Figure 1) is
evenly distributed across the US, India and the EMs (Latin America,
CIS and Africa). This is encouraging, as it reduces the dependence on
a single geography to deliver. We expect a 32% EBITDA growth in
FY12 on a 19% sales growth due to expected margin expansion:
● US base business margins should increase due to the launch of
the high-margin oral contraceptive portfolio (Glenmark has
launched three products so far and we expect another six-eight
approvals in FY12).
● Turnaround in Latin America: Glenmark has been loss-making at
the operational level in Latin America (close to breaking even
currently). It is present in Brazil, Mexico and Venezuela with bulk
of the revenue coming from Brazil. We expect Glenmark to turn
EBITDA positive in FY12, as new products are launched in these
regions.
R&D pipeline could surprise positively
We believe the current share price does not attribute any value to the
R&D pipeline, as most of the molecules are in phase I and phase II.
We agree that globally too molecules in phase I and phase II are not
assigned values. However, as Glenmark has been out-licensing the
R&D molecules in phase I and phase II, the milestone payments
(upfront and subsequent) help improve balance sheet further and
support generic business growth.
The most advanced molecule in the pipeline is Crofelemer, where
Glenmark has the right for the RoW markets (except North America,
Japan, China and Europe). The drug is used to treat HIV-induced
diarrhoea. Glenmark and Napo Pharma entered into an agreement in
July 2005, which gave Glenmark the exclusive right to market the drug
in 140 countries and additionally supply API to Napo. Salix Pharma
has successfully completed the phase III trials of Crofelemer in the US
and expects Crofelemer to be a US$60 mn opportunity in the US.
Glenmark expects peak sales of US$80 mn in its 140 countries and
plans to launch the molecule at end-FY12. Currently, we do not assign
any value to Crofelemer.
Improving balance sheet bodes well
In the past two years, Glenmark has been operating at high gearing
ratios. This is important as high leverage limits spending on R&D and
capex on the facilities, which in turn impacts growth. The company
reported significant improvements in its balance sheet in 2Q11.
Receivable days fell from 157 to 118, as the company managed to
collect some long-delayed payments from US customers, and debtors
of more than six months almost halved to Rs2 bn. Inventory days also
fell from 157 days to 118 days. However, further improvement is
required in the balance sheet for the stock to rerate.
Maintain OUTPERFORM; target price of Rs360
We value Glenmark at a discount to the sector average at 18x FY12E
(due to lower returns and stretched balance sheet) and value the base
business at Rs336/share. Additionally, the value of its FTF pipeline is
Rs24/share in our target price of Rs360.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Glenmark------------------------------------------------------------------------ Maintain OUTPERFORM
Balance sheet improvement critical for rerating
● We assume coverage of Glenmark with an OUTPERFORM and a
target price of Rs360 (versus Rs390 earlier). We expect a strong
EBITDA growth of 26% over FY11-13 in the base business, driven
by a balanced mix of profit growth across geographies.
● The current market price assigns no value to the R&D pipeline, as
these molecules are still in phase I and phase II. However, the
milestone payments associated with the out-licensing of these
molecules are material and could surprise positively.
● Glenmark trades below the sector average due to its low RoCE
and stretched balance sheet. Margins have been subdued in 9M
FY11, but we expect margins to recover in FY12, as some of the
niche products are launched in the US and Latin America turns
EBITDA positive. Balance sheet did improve significantly in 2Q11,
but as more improvement is visible, the stock should rerate.
● We value Glenmark at 18x FY12E earnings to value the base
business at Rs336/share. Additionally, the value of its FTF
pipeline is Rs24/share in our target price of Rs360. We cut our
forward estimates (FY12/13 by 17/8%), as we remove the Tarka
upside from our model.
Balanced mix of profit growth
If we split the incremental sales and EBITDA growth for Glenmark for
FY12 and FY13, we observe that the growth profile (Figure 1) is
evenly distributed across the US, India and the EMs (Latin America,
CIS and Africa). This is encouraging, as it reduces the dependence on
a single geography to deliver. We expect a 32% EBITDA growth in
FY12 on a 19% sales growth due to expected margin expansion:
● US base business margins should increase due to the launch of
the high-margin oral contraceptive portfolio (Glenmark has
launched three products so far and we expect another six-eight
approvals in FY12).
● Turnaround in Latin America: Glenmark has been loss-making at
the operational level in Latin America (close to breaking even
currently). It is present in Brazil, Mexico and Venezuela with bulk
of the revenue coming from Brazil. We expect Glenmark to turn
EBITDA positive in FY12, as new products are launched in these
regions.
R&D pipeline could surprise positively
We believe the current share price does not attribute any value to the
R&D pipeline, as most of the molecules are in phase I and phase II.
We agree that globally too molecules in phase I and phase II are not
assigned values. However, as Glenmark has been out-licensing the
R&D molecules in phase I and phase II, the milestone payments
(upfront and subsequent) help improve balance sheet further and
support generic business growth.
The most advanced molecule in the pipeline is Crofelemer, where
Glenmark has the right for the RoW markets (except North America,
Japan, China and Europe). The drug is used to treat HIV-induced
diarrhoea. Glenmark and Napo Pharma entered into an agreement in
July 2005, which gave Glenmark the exclusive right to market the drug
in 140 countries and additionally supply API to Napo. Salix Pharma
has successfully completed the phase III trials of Crofelemer in the US
and expects Crofelemer to be a US$60 mn opportunity in the US.
Glenmark expects peak sales of US$80 mn in its 140 countries and
plans to launch the molecule at end-FY12. Currently, we do not assign
any value to Crofelemer.
Improving balance sheet bodes well
In the past two years, Glenmark has been operating at high gearing
ratios. This is important as high leverage limits spending on R&D and
capex on the facilities, which in turn impacts growth. The company
reported significant improvements in its balance sheet in 2Q11.
Receivable days fell from 157 to 118, as the company managed to
collect some long-delayed payments from US customers, and debtors
of more than six months almost halved to Rs2 bn. Inventory days also
fell from 157 days to 118 days. However, further improvement is
required in the balance sheet for the stock to rerate.
Maintain OUTPERFORM; target price of Rs360
We value Glenmark at a discount to the sector average at 18x FY12E
(due to lower returns and stretched balance sheet) and value the base
business at Rs336/share. Additionally, the value of its FTF pipeline is
Rs24/share in our target price of Rs360.
No comments:
Post a Comment