Glenmark Pharma Rating ‘Hold’; subsidiary’s IPO could unlock value for company

However, many unknowns remain for the API business given the recent strong performance was driven by COVID-19-led higher demand and customer stocking to a large extent, in our view.

Glenmark Life Sciences (GLS; Glenmark Pharma’s 100% subsidiary for API or active pharmaceuticals ingredients) filed a draft red herring prospectus (DRHP) on 16 April 2021 with SEBI for an IPO, comprising a fresh issue of up to Rs 11.6 bn and an offer for sale of up to 7.31m shares (potential total proceeds of c$210 m). The IPO will be subject to market conditions, requisite approvals and other considerations, per the company. The bulk of IPO proceeds will be used for payment of outstanding purchase consideration to the promoters for the spin-off of the API business, and capex funding.

Potential value-unlocking event but many unknowns: GLS reported sales of Rs 10.2 bn in FY20 (9.6% of GNP’s total revenues, FY17-20 CAGR of 8.2%), though 9MFY21 sales at Rs 8.8 bn have grown 14.9% yoy, primarily on strong customer demand. A successful IPO by GLS would help GNP in value unlocking for the API business where the demand outlook remains robust. However, many unknowns remain for the API business given the recent strong performance was driven by COVID-19-led higher demand and customer stocking to a large extent, in our view.

Moreover, Chinese manufacturers have maintained their dominance in the global API market and any potential market shift to other regions may happen very gradually. While market growth opportunities remain, company-specific (e.g. GLS) benefits would be determined by scale, product portfolio, cost competitiveness, customer relationships, GMP compliance records, etc. Valuation-wise, we note that similar-sized API companies – such as Solara Active, Aarti Drugs, etc – are valued at 18-20x FY22e consensus PE.

Retain Hold with unchanged TP of Rs 550: The potential IPO proceeds from GLS could help GNP in debt reduction (with net debt of Rs 36.4 bn and net debt/Ebitda of 1.75x, GNP remains one of the most leveraged names in our coverage and it has seen very slow progress in debt reduction). It is currently trading at 15.3x/13.6x FY22e/23e our EPS estimates, vs a three-year average PE of 16.1x.

While we see ample headroom for a potential valuation re-rating, we think it needs to be backed by improved execution on US sales and debt reduction to improve investor sentiment and management’s execution record. We retain our fair value TP of Rs 550 and Hold rating for GNP as we look for visible improvement in execution.