In the light of continued uncertainty in economic environment and in currency and financial markets, Glenmark Pharmaceuticals (Glenmark) has changed its near-to-medium term strategy to focus more on consolidation than pursuing aggressive growth and expansion.
The strategy would involve lower capital expenditure (capex), staying away from acquisitions, overall cost optimisation and working capital management.
The market is ascribing zero value to Glenmark’s research and development (R&D) pipeline, which we believe, remains strong and holds great future potential.
The company continues to actively scout for partners for its key molecules. Due to the uncertainty clouding the conclusion of the deals, we have removed any outlicencing income from our consolidated estimates.
Favorable data on any of these molecules is likely to fetch upsides in the form of milestone payments/outlicensing income and significantly enhance the value of the pipeline.
Despite delivering a subdued performance in H1FY2009, Glenmark’s management chose to hold onto its original guidance until as late as January 2009.
This has unnerved the faith of investors in the management’s policies, causing investors to doubt the management’s claim or being able to deliver a 20-25% profit growth in FY2010.
Further, some investors also believe that the current lowering of guidance / not providing guidance is to ‘clean-up’ the overstatement of earnings in the past.
Since we do not have access to any additional information (other thaluationn what is published in public domain), it is difficult to validate/invalidate this concern.
We have lowered our FY2010 revenue and profit estimates for Glenmark by 5.8% and 8.5% respectively to Rs2,633.8 crore and Rs438.8 crore in order to account for the near-term challenges faced by the company.
Our revised earnings per share for FY2010 stands at Rs17.5, whereas our FY2009 estimates are unchanged.
The stock has corrected significantly since we downgraded it to ‘Hold’ in our report dated October 24, 2008.
In our view, the management’s stance of holding onto its guidance despite multiple signals to the contrary, the recent policy of not providing any guidance, and low visibility on outlicensing deals have been more than priced into the stock.
At Rs156, the stock trades at 9.9x FY2009 earnings and at 8.9x FY2010 earnings. We upgrade our recommendation on the stock to BUY with a price target of Rs270 (12x FY2010 core earnings for base business plus Rs60 per share for the R&D pipeline).