Stock corner: Reiterate ‘buy’ on Glenmark with target price of Rs 663

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Published: November 20, 2019 1:13:30 AM

We revise our SOTP-based TP to INR663: base business at INR818/sh based on 15x (unchanged) Nov-21F EPS ex innovation R&D spending; and INR155/sh for innovation R&D based on 8x innovation research EPS impact.

Stock corner, buy Glenmark, target price, market news, Glenmark share, Glenmark share price, The stock currently trades at 12.3x/9.9x FY20F/21F EPS of INR24.4/INR30.5. The stock trades at 6.9x/6.0x FY20F/21F ex-innovation spending EPS of INR43.8/INR50.1.

GNP’s 2QFY20 results were ahead our estimates (please refer to 2QFY20: A strong quarter). Strong growth in India and a q-q step-up in revenues in the US were the key positives. We expect GNP to outperform in India on the back of new product launches, consumer products and presence in fast-growing therapy segments. In the US, given the sharp q-q rise, some moderation in sales in ensuing quarters cannot be ruled out. As of Jun’19, we estimate GNP had 58 ANDAs pending approval with market size of USD32bn. Given the uncertainties in US generics, we remain conservative, as we forecast USD494mn in FY22F vs a 2QFY20 run-rate of USD480mn. Besides the ramp up in recent launches, some of the known interesting new approvals include gVoltaren gel and gBrovana over the next 12-18 months.

GNP’s net debt has been stuck at INR34-36bn over the past 3-4 years. The key reasons, in our view, are a significant step up in R&D and a rise in capex and intangibles. We note that GNP’s rise in capex is not unique, and GNP’s sales-to-assets ratio is in line with, or better than, peers’. We think a rise in innovation R&D spending caused the most adverse impact on cash flows. Therefore, GNP’s attempt to raise capital in the innovation subsidiary could preserve cash flows from the base business and also lead to value unlocking.

We revise our estimates to factor in 1HFY20 results. We increase FY20F EPS by 4% to factor in the strong 2QFY20. We lower FY21F/22F EPS by 7-8% due to higher R&D and employee cost estimates.

We revise our SOTP-based TP to INR663: base business at INR818/sh based on 15x (unchanged) Nov-21F EPS ex innovation R&D spending; and INR155/sh for innovation R&D based on 8x innovation research EPS impact.

The stock currently trades at 12.3x/9.9x FY20F/21F EPS of INR24.4/INR30.5. The stock trades at 6.9x/6.0x FY20F/21F ex-innovation spending EPS of INR43.8/INR50.1.

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