We think GNP’s move to curtail R&D spending, control other costs, and to raise funds for innovation subsidiary Ichnos are key positives. These moves could help provide support to earnings and also address investor concerns on high debt. Though clinical success in pipeline projects is still awaited, we think the current market environment is supportive of fundraising at Ichnos. Irrespective of the valuation, we think fundraising will be positive for the stock, as the market is currently attributing negative value to innovation efforts. Further, Ichnos’ dependence on cash flows from other businesses is likely to reduce, in our view.
GNP’s domestic formulation business has outperformed the broader market in the past and we expect this trend to continue. The company stands out among peers with successful new product launches. We expect recent launches of Favipiravir and Remogliflozin to help deliver above average growth in the near-medium term. However, GNP’s growth in the US and EM is underwhelming due to pricing pressures and adverse currency movements.
We factor in lower revenues in US/EM and Covid-19-related impacts and factor in lower cost. EPS for FY21F/22F is revised -4%/1%, respectively. We value GNP based on SOTP (unchanged). We assess the negative impact of innovation R&D spending at INR149sh (at 8x net impact of the R&D spending). We continue to value the base business excluding the impact of innovation R&D spending at 15x one-year-forward earnings. We arrive at Aug 2021 target price of INR727.
Improvement in the valuation of Ichnos and the base business is a possibility. Fundraising at Ichnos. Quarterly results demonstrating efforts on lowering costs and improving cash flows. GNP is trading at 17.6x/13.1x FY21F/22F EPS and 9.2x/7.6x FY21F/22F EV/EBITDA, which is a significant discount to peers.