Neutral Glenmark Pharmaceuticals For Target Rs. 780 - Motilal Oswal Financial Services
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Earnings neutral event
* Glenmark Pharma (GNP) has proposed to divest its API business, Glenmark Lifescience (GLS) with the aim of reducing debt and increasing its emphasis on branded/innovative products.
* This is the third transaction by GNP with a cumulative cash generation of INR62.5b over the past 12-15M.
* After the stake sale, GNP is set to transition from a net debt position of INR29.5b to a cash surplus INR21b.
* The net reduction in overall EBITDA due to the sale of API business (INR5.5b) would be partially offset by a reduction in interest (INR4.2b).
* Expecting significant deleveraging and superior execution in both the domestic formulation (DF) and EU/ROW markets, we anticipate an improved outlook for GNP over the next 2-3 years, which should positively impact return ratios to some extent. We value GNP at 14x 12M forward earnings to arrive at a price target of INR780. We maintain our Neutral rating, given that the current valuation adequately captures potential earnings upside/better return ratios.
Key highlights of the transaction
* As part of its strategic initiative to move up the value chain toward branded generics in DF/EM and discovery-based products, GNP intends to divest a 75% stake in GLS to Nirma at INR615 per share, for an aggregate consideration of INR56.5b. GNP would retain 7.84% stake in the company post divestment.
* Nirma has extended an open offer to the remaining shareholders of GLS shareholders at INR631 per share. GLS may also approve and declare an interim dividend of INR22.5 per share. In the event of such a dividend declaration, the sale consideration would be adjusted accordingly.
* The net debt of the GNP stands at INR29.5b (1QFY24). The completion of transaction would make GNP cash positive (~INR21.4b) on a post-tax basis.
* Further, GNP plans to allocate its cash reserves toward specific in-licensing opportunities and capex. GNP indicated that the cash would not be used for any high value M&A opportunities.
Other Highlights
* GNP is focusing on the high double?digit CAGR in Europe and RoW markets.
* It indicated gross margin improvement with a higher share of branded generic business.
* The EBITDA margin is anticipated to improve, primarily driven by the increasing contribution of RYALTRIS and other branded products, a reduction in R&D spend to 7-8% of consolidated revenue, and higher operating leverage in Europe and LATAM.
* PAT margin to improve due to lower interest cost.
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