Glenmark Pharmaceuticals Ltd’s plans for listing its wholly owned subsidiary, Glenmark Generics Ltd (GGL), have been put on hold indefinitely. The listing was a crucial part of the company’s plan to lower debt on its balance sheet. Explaining this decision, its annual report says: “The announcement of the IPO (initial public offering) did not provide any visibility to value creation for the parent company’s shareholders and with the overall debt falling sharply, the listing of the subsidiary was not serving any objective.”
That seems to imply that the company was not getting the desired valuation for GGL. The company was created as a 100% subsidiary, by spinning off the generics business of Glenmark, leaving it with the speciality pharmaceuticals and research facilities. In a conventional demerger, shareholders are directly given shares of the new company which is listed. The subsidiary option is usually preferred, when the parent wants to raise funds, using the market value of the subsidiary. GGL planned to raise around Rs 575 crore through an IPO, to pay Glenmark for the transfer of the generics division.
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Glenmark would have used this money to retire its own debt. The idea was to spin off the division, raise funds and list the company, repay debt, and also unlock value in the form of an independent market capitalization of GGL. The subsidiary’s value would then have reflected in Glenmark’s valuation too. But the company’s expectations do not appear to have been met, causing the plan to be canned.
Instead, Glenmark relied on other sources for funds to meet its commitments in fiscal 2010. The firm focused on cost control and also improved its working capital management. Its net cash generated from operations rose to Rs 352 crore, compared with Rs 15 crore in the previous year. The previous year, cash flows had been affected by a sharp increase in inventories. It also deferred capital expenditure where possible. It raised Rs 415 crore through a qualified institutional placement.
While its cash position improved, ongoing capital investments and debt-related payments still took away a substantial portion of internal cash surpluses. It could lower debt by only 11% to Rs 1,869 crore, which is not much. But its net worth rose due to the equity issue and a healthy growth in profits. Thus, its debt to equity ratio came down to a more acceptable level of 0.8 times, compared with 1.3 times in the previous year.
Glenmark’s performance in the June quarter was good, with revenue rising by around 27% and operating profit nearly doubling. If it can keep the momentum, internal accruals should help it meet resource requirements and also repay debt. That will strengthen its balance sheet further. While the spin-off appears to have lost its relevance, so has the need for a separate subsidiary to house the generics business.
Graphic by Yogesh Kumar/Mint
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