Mumbai: Glenmark Pharmaceuticals Ltd and Divi’s Laboratories Ltd are the new favourites of fund managers over some of India’s top drug makers such as Dr Reddy’s Laboratories Ltd and Ranbaxy Laboratories Ltd. The trend, that first emerged around two years ago will be sustained in the forthcoming quarterly results season, say analysts.
Though Sun Pharmaceuticals Ltd continues to lead the sector in terms of market value with a market capitalization of over Rs20,000 crore, Glenmark and Divi’s have muscled their way into the top 10 listed drug makers in India by market capitalization, although they do not figure among the top firms by sales. Glenmark, for instance, has a price to earnings (P-E) multiple of 93 as against 25.3 for Ranbaxy despite the fact that its sales of Rs802.64 crore is about a quarter of Ranbaxy’s Rs4,117.22 crore.
The P-E multiple of a share—an indicator of how much investors value a company—is the premium (multiple) which the stock market is prepared to pay for every rupee of the company’s earnings per share. Divi’s has the second highest P-E multiple among the top 10 drug makers at 46.24, though its revenues are the least.
Shares of Divi’s have soared some 268% to Rs667.10 each since March last year, a period when the Bombay Stock Exchange’s health-care index shed 0.87% to 3,824.91. The Glenmark stock more than doubled to Rs685-levels in the same 15 months.
Volatility of business among large drug firms is a factor for the relatively high valuation of the smaller firms, says an analyst. Rajesh Vora, vice president at ICICI Securities Ltd, says that while big drug makers have on more than one occasion wavered in their performance, companies such as Glenmark and Sun Pharma have done well consistently. “There is a very good chance that these two companies will continue to reward investors in the long term,” he says.
Vora predicts Glenmark will nearly double net profits this financial year. According to Amit Shah, a research analyst with HDFC Securities Ltd, Glenmark’s earnings per share is expected to be Rs39 for 2008 and Rs50 for 2009 if you take into account some out licensing deals that it may sign. “This represents an EPS growth of over 40%, which is quite high compared with most other companies in this space,” he adds.
Glenn Saldanha, chief executive officer of Glenmark, which has licensed out three drug molecules to companies including Merck KGaA, says another molecule—that could be used in pain management drugs—is in the process of being out-licensed. The company has received $58 million (about Rs232 crore) to date licensing out these products— nearly thrice the $20 million it has spent on its entire drugs development programme.
“We have been able to consistently show proof in the delivery where monetizing research is concerned and we have a very robust R&D pipeline, and are much ahead of our peer group,” he adds.
For Divi’s, Motilal Oswal Securities Ltd, a Mumbai brokerage firm, estimates that revenues for the June quarter could grow by 44% to Rs230 crore, led by continued momentum in both the generics and custom chemical synthesis business. “Established relationships with the top 20 innovator pharmaceutical companies should help the company in procuring more outsourcing business as well as in spreading business risk across customers,” analysts Nimish Desai and Jinesh K. Gandhi wrote in a Motilal Oswal report. They expect the company’s EPS to grow to Rs206.9 in 2008 and Rs255.2 in 2009 from Rs144.95.
The firm estimates that the sector may report average sales growth of 15% for the June quarter, pulled up in part by the smaller firms as bigger firms are expected to report sluggish quarters.