Buy Glenmark Pharma; target Rs 395: FinQuest Securities

FinQuest Securities is bullish on Glenmark Pharma (GNP) and has recommended buy rating on the stock with a target price of Rs 395 in its May 10, 2012 research report.

"Glenmark Pharma (GNP)'s Q4FY12 numbers came in ahead of ours as well as market expectations. Revenue was 6%/8% higher than ours as well as consensus estimate respectively at Rs.10,659mn. Core EBITDA was 2% higher than our estimate of Rs.1,864mn. The strong set of results was due to revenue growth across geographies backed by new launches and monetizing of FTF opportunities (Malorone & Cutivate) in the US generic market. We believe low expectations from the stock coupled with negative market sentiment where investors on betting on defensive stocks makes risk reward favorable. We believe balance sheet position has improved which can be seen from reduction in overall working capital cycle from 163 days to 120 days. Management's focus to strengthen its balance sheet can be seen from reduction in net debt over a period of time and company's guidance to focus on reducing debt from the free cash flow going ahead.”

"The management is maintaining the core EBIDTA (ex-licensing and forex) guidance at the current levels which is positive for the stock considering the margin pressure they have been facing during the last three quarters. However we believe that this is on the conservative side. Strong revenue guidance of 22-25% (ex-licensing) will be driven by monetizing of FTF opportunities and new product launches. We expect the company to deliver 22.6% growth in top line (ex-licensing income) and maintain the current core EBIDTA margins of 19.8% in FY13. We believe any improvement in core EBIDTA margins will trigger re-rating as we feel worst is already priced in the stock. GNP in the last 10 years has not given such high percentage of dividend. We believe high dividend percentage declared by the management could be a sign that perhaps the management is expecting healthy profitability growth going ahead delivering strong free cash flow.”

"We maintain our BUY rating on GNP and increase our 1 yr target price to Rs.395. We believe low expectations from the stock coupled with negative markets sentiment where investors are going defensive makes risk reward favorable. GNP is currently trading at a P/E of 16x FY13E and 12.1x FY14E compared to a sector mean of 21x and 18.4x respectively. We have used DCF to arrive at the base business valuation (including FTF valuation as the cash flow are visible) while we value GNP's pipeline using risk adjusted probability based DCF approach,” says FinQuest Securities research report.

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