Recommendation: Buy
CMP = Rs 599 (at the time of this recommendation)
Price target: Rs 754
Key points:
- Glenmark Pharmaceuticals has proved itself as India's best play on research-led innovation. Of its pipeline of 13 molecules, five molecules are undergoing clinical trials. The company has managed to clinch four out-licensing deals for its developmental molecules collectively worth $734 million and has already received $117 million in initial milestone payments for the same. It has recently decided to restructure its business into two separate entities: GPL and GGL. GGL would be a 100% subsidiary of GPL and would be listed on the Indian bourses.
- Its core business comprising generics in the USA and branded formulations in Latin America, the other semi-regulated markets and in India has seen stupendous success, due to its focus on niche specialties and brand building. I expect the core business to grow at a 34% CAGR over FY2008-10, driven by a CAGR of 40% in the generic segment and a 29% CAGR in the branded formulation business.
- I expect Glenmark's consolidated revenues to grow at a 31% CAGR over FY2008-10 to Rs 3,377.7 crore, driven by a 34% CAGR in the core business and a $60-million milestone income in each of the two years. A robust growth in the top line would lead to a 26% CAGR in the consolidated profits over FY2008-10 to Rs 994.8 crore.
- Assigning a PE multiple of 18x to its fully diluted core earnings of Rs 30.6 per share in FY2010E, I value Glenmark's core business at Rs 550 per share.
- I recommend a Buy option on this stock with a price target of Rs 754.
