Buy Glenmark Pharmaceuticals - Re-rating on the cards - Elara Capital

• Rating : Buy
• Target Price : INR495
• Upside : 35%
• CMP : INR368 (as on 3 November 2010)

Re-rating on the cards

All inclusive growth of brands drive domestic formulations

Glenmark has achieved robust growth across the segments in domestic formulations. The management is confident that domestic formulation growth is sustainable on the back of the company's increase in sales, which is evenly spread out across the large and smaller brands. Candid, Candid-B, Telma, and Telma-H have led the surge in branded formulation portfolio.

US revenues shifts to niche drugs with limited competition

We note that the company is increasingly gaining revenues from niche therapeutic areas with smaller market size and stable market share. Increasing presence in hormones and dermatology has led the company's niche therapeutic portfolio. The management believes that the filing ANDAs in respiratory segment would enhance the portfolio further in near to medium term.

Emerging market poised to change gear

With product rationalization, optimization of work force, and utilization of existing infrastructures since 2008, the company is poised to gain full benefits of its structural changes in its emerging market business. The management expects Latam continue to grow at 30% while Russia maintain its growth rate at 30-35% despite high base.

Valuation: Rerating expected; upgrade to Buy; TP at INR 495

With significant improvement in asset quality, lower working capital cycle, and huge valuation gap with peers, the valuation of the stock is poised to be rerated. We derive 12-month target price at INR 495, averaging FCFF and target PER methodologies. Assuming 8% risk-free rate, 5% risk premium, and 2% terminal growth rate, we derive price objective of INR 537 with WACC of 12%. We assign 18x (at 30% discount to the peers) to FY13 earnings to arrive at price objective of INR 466 in target PER. Our target price implies 35% upside potentials to the current market price. We upgrade our recommendation to Buy.

Source : Equity Bulls

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