Glenmark: Risk-reward turning favourable even as stocks hit 52-week low

Businesses in other geographies can drive growth, US challenges remain

Drug major Glenmark, which lost nearly 40 per cent of its market value in the past year, saw its share price hit a 52-week low last week on concerns over growth in its US business.

With operating profit margins at 14.6 per cent in the December 2017 quarter (Q3) — the lowest in its recent past — and net profit plunging 78 per cent, the Street sentiment is likely to remain weak.

The company’s US sales fell 40 per cent year-on-year in Q3, mainly due to a high base in the year-ago quarter that witnessed the launch of cholesterol lowering drug Zetia generics on exclusivity.

Pricing pressures will also keep a check on Glenmark’s near-term growth in the US, the world’s largest health care market. The management, too, has indicated this and expects the trend to continue in FY19.

Analysts at ICICI Securities said the recent launches would help to improve the revenue run-rate, but increasing competition and pricing pressure would limit growth.
 

However, most of these concerns seem to be priced in at current levels.

Ranbir Singh at Systematix Shares said a steep correction in the share price seemed to be overdone. ICICI Securities said the recent fall in the stock price had made valuations reasonable, and given the potential margin improvement on the back of a better revenue mix, the brokerage remains positive.

The confidence stems from the fact that while the US, which contributes a third to Glenmark’s sales, may remain weak, the remaining businesses are expected to do well.

Domestic sales (a fourth of revenues) were up 12 per cent (14.5 per cent if adjusted for the goods and services tax implementation) in Q3. Recent data from Motilal Oswal Securities show that Glenmark has reported 12.6 per cent growth in sales in January. The rest of world markets, which contribute nearly 15 per cent to the company’s top line, had also seen 28.3 per cent growth. The European market (10 per cent) grew 15 per cent in Q3. 

Glenmark is now targeting about 15 per cent growth from the non-US markets, which account for nearly two-thirds of its overall sales. 

Against the backdrop of US challenges, while analysts have lowered their estimates, they still expect an upside. 

ICICI Securities estimates revenue and adjusted net profit to grow at a compounded annual rate of 7.6 per cent and 14.6 per cent, respectively, during FY18-20, with the operating profit margin expected to increase 100 basis points.

Besides, Glenmark continues to explore out-licensing deals from its late-phase clinical pipeline. Last week, it presented new data on  an atopic dermatitis treatment molecule (GBR 830) at the 2018 American Academy of Dermatology Annual Meeting in San Diego. Any announcement on this front can help improve the Street’s sentiment. 

Also, the money earned from it can be used to pare debt.