Glenmark: Trying to build a differentiated business model
Trying to build a differentiated business model
Glenmark is the most successful NCE research company from India having out-licensed 5 NCEs & generating upfront & milestone income of USD207m till date. Requirement of higher working capital to fund strong growth had led to significant increase in debt in the past which now seems to be correcting. A differentiated US pipeline coupled with improved working capital and moderate capex will give the management flexibility to target debt reduction. The stock trades at 17.7x FY13E and 13.6x FY14E EPS. BUY with TP of Rs442 (16x FY14E EPS + Rs12 DCF value for Crofelemer and Para-IV upsides).
EPS to record 54% CAGR over FY12-14 on a low base led by:
- Expect overall topline to grow at 16% CAGR (19% CAGR excl NCE licensing income) led by 22% CAGR for emerging market revenues, 18% for India formulations and 18% for core US business. EPS CAGR of 54% driven by EBITDA margin expansion and reversal of forex losses.
- Management has guided for 22-25% topline growth for FY13 and EBITDA at INR9-9.25b - Motilal oswal believe this is achievable.
- Over FY12-14, we expect RoCE to increase from 12.1% to 20.1%, and RoE from 13.5% to 20.5% led by improved working capital and gradual debt reduction.
- Their estimates exclude NCE licensing income.
- Valued at 17.7x FY13E and 13.6x FY14E earnings. BUY with TP of Rs442 (16x FY14E EPS + Rs12 DCF value for Crofelemer and Para-IV upsides).
US core revenues to grow at 18% CAGR for FY12-14
- GNP currently has ~38 ANDAs pending US FDA approval. It has already launched 7 oral contraceptives (OCs) in the US over the past few quarters but is yet to record meaningful revenues from them. It expects 3-4 more OC approvals over the next 12 months.
- Glenmark has commenced filings for niche opportunities in the Dermatology, Controlled Substances and Hormones categories and has also started receiving some approvals in these categories, which is a long-term positive.
- The management has, in the past, guided that ~75% of the pending ANDAs are in the niche/low-competition category, and will thus, result in a differentiated portfolio in the long-term.
India & emerging markets to grow at 20%+ CAGR
- Glenmark has recorded a strong 18% CAGR for its India formulations (DF) business in the last five years.
- Glenmark believe that the company will be able to sustain the growth momentum into FY13 as well, although higher base effect may become visible from FY14 onwards.
- However, Motilal oswal expect Glenmark to outperform the average industry growth of 14-15% over the next two years.
- Motilal oswal expect the emerging markets portfolio to record 22% CAGR over FY12-14 led by Latam, Russia & Africa regions.
Balance sheet concerns receding
- High working capital required to fund past growth had led to increase in debt for Glenmark.
- Motilal oswal believe that the balance sheet concerns are now receding with Glenmark managing to reduce working capital substantially in FY12 compared to past years.
- Current working capital days stand at 128days v/s 203 days in FY11
- Further net debt has gone down YoY by Rs2b to Rs17.5b in FY12. Motilal oswal estimate further debt reduction of Rs4b over next 2 years.
- Return ratios are likely to gradually improve over the next two years.
- Over FY12-14, Motilal oswal expect RoCE to increase from 12.1% to 20.1%, and RoE from 13.5% to 20.5%.
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