Multiple triggers in Glenmark

The strong outlook for the company is due to a robust US product pipeline, faster-than-industry growth in India as well as potential research upsides

The Glenmark Pharmaceuticals stock touched its four-year high on Tuesday following strong FY13 revenue guidance by the management last week as well as improving outlook for the next two years. The company is expected to post a revenue growth of 25 per cent, which will help it achieve sales of Rs 5,000 crore for the current fiscal, according to the company’s chairman and managing director, Glenn Saldanha.

Moreover, most analysts are positive on the company due to a strong 20 per cent earnings growth potential, diversified geographic as well as sales mix and possibility of an upside from its research pipeline. Sameer Baisiwala and Saniel Chandrawat of Morgan Stanley Research expect the company's earnings to grow 23 per cent annually during FY12-15 driven by growth in attractive markets (India, US, Brazil and Russia), lucrative therapies (dermatology, cardiovascular and respiratory segments) and niche US opportunities.

Given strong growth potential, leading brokerages have put an 'outperformer' rating post which the stock gained 14 per cent over the last 10 days. Over the last one year, the stock has gained 66 per cent, outperforming the BSE Healthcare index (40 per cent) as well as the Sensex (26.5 per cent). At Rs 487, the stock is trading at 19 times its FY14 estimated earnings and analysts peg the target price over the next one year at between Rs 515 and Rs 545, which translates into gains of 6-12 per cent. Any positive surprise on the research front could increase the gains. In this backdrop, investors can take exposure to the stock on dips but should have a long term holding period for any meaningful gains.
 

BETTER MARGINS AHEAD
In Rs crore	FY12	FY13E	FY14E
Net sales	4,020	4,844	5,714
% change y-o-y	36.3	20.5	18.0
Ebitda	845	915	1,111
% change y-o-y	42.7	8.3	21.4
Ebitda (%)	21.0	18.9	19.4
Net profit	464	568	685
% change y-o-y	65.1	22.4	20.6
P/E (x)	28.3	23.2	19.2
E: Estimates                                               Source: Credit Suisse

Business growth
With the domestic pharmaceutical market expected to grow upwards of 15 per cent, Glenmark which gets 27 per cent of overall revenues from India is expected to gain given its product focus and higher-than-industry growth. The company posted a 26 per cent growth over the last year driven largely by new product introductions while the sector grew at 15.3 per cent. Say Manoj Garg and Perin Ali of Edelweiss Securities, “Growth in its focus therapy such as cardio vascular system and respiratory was 20 per cent and 28 per cent, while dermatology grew in line with the industry. The portfolio selection and smart positioning continues to bode well for Glenmark.” The new pricing policy is also unlikely to be an overhang, as the impact on Glenmark is limited given that only 12 per cent of India revenues (three per cent of total revenues) will come under control. Credit Suisse analysts expect the impact on consolidated earnings per share (EPS) to be less than two per cent due to the new policy.

In the US market, which accounts for 30 per cent of its overall revenues, the company has a strong ANDA pipeline and is awaiting approval on 40 products. Additionally, Morgan Stanley analysts see growth drivers from a ramp-up in recent launches, continued low competition in recent Para IV launches and growth in oral contraceptives.

Upsides from research
In addition to business growth, the company has a healthy research pipeline which could pay dividends as the various molecules move to their next stages. Morgan Stanley analysts say that new chemical and biological entities could be important valuation drivers over the next two years as four Phase II clinical studies come to an end. This could open avenues for cash generation either through milestone payments or out-licensing deals. The first major trigger in the March quarter of FY13 could be Revamilast to treat rheumatoid arthritis.

Analysts at Credit Suisse and Morgan Stanley say that upsides from the research pipeline are not captured in the price, with the latter attributing Rs 38 to the research assets in its sum of parts target price of Rs 534. On the flip side, given the disappointments in the past and the high-risk nature of such investments, investors also need to be cautious on the potential upside from Glenmark’s pipeline.