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Weak margins; US base business under pressure

About the stock: Glenmark’s business is separated into three entitie

*Glenmark Pharmaceuticals for building a global generic, specialty and OTC business in therapy areas of dermatology, respiratory, oncology among others

*Glenmark Life Sciences for manufacturing and marketing APIs

*Innovation new company (ICHNOS) to focus on discovery and development of novel, first?in?class treatments in the therapeutic areas of immunology, oncology and pain encompassing both NBEs as well as NCEs

Q1FY23 Results: Glenmark reported traction in India (ex-Covid) while the US performance was subdued (both YoY and QoQ) as were margins.

* Sales were down 6% YoY to | 2777 crore

* EBITDA was at | 432 crore, down 25% YoY with margins at 15.5%

* Adjusted PAT was at | 192 crore (down 37% YoY)

What should investors do?Glenmark’s share price has de-grown by ~0.9x over past three years (from ~| 416 in August 2019 to ~| 388 levels in August 2022).

* Maintain HOLD as we await EBITDA margin sustainability besides persisting US base business pressure amid regulatory hurdles at Monroe facility

Target Price and Valuation: We value Glenmark at |440 based on SOTP valuation

Key triggers for future price performance:

* In the US, regulatory clearance for newly commissioned US based Monroe facility will be the key determinant for future launches

* Traction for Ryaltris in global markets along with the launch in the US

* In India, it is the market leader in dermatology and improving its presence in respiratory, CVS, anti-infectives and anti-diabetics, in particular. It has also forayed into consumer health segment focusing on Rx-OTC switch products led by two brands, Candid and Scalpe+

* Progress on the margins front amid cost rationalisation measures and decline in R&D expenses as percentage of sales

Alternate Stock Idea:: Apart from Glenmark, in healthcare coverage we like Ajanta.

* Ajanta Pharma is a focused player in branded space with specific strategy for maximum number of first time launches with new drug delivery system

* BUY with a target price of | 1495

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