Glenmark Pharmaceuticals Cluster: Apple Green Recommendation: Buy Price target: Rs754 Current market price: Rs599
Creating innovative value
Key points
Best play on R&D-led innovation: Glenmark Pharmaceuticals (Glenmark) has proved itself as India's best play on research-led innovation. Of its pipeline of 13 molecules, five molecules are undergoing clinical trials. The company has managed to clinch four outlicencing deals for its developmental molecules collectively worth $734 million and has already received $117 million in initial milestone payments for the same.
Re-organisation of business to enhance focus: Glenmark has recently decided to restructure its business into two separate entities: GPL and GGL. GGL would be a 100% subsidiary of GPL and would be listed on the Indian bourses.
Core business has strong potential: Glenmark's core business comprising generics in the USA and branded formulations in Latin America, the other semi-regulated markets and in India has seen stupendous success, due to its focus on niche specialties and brand building. We expect the core business to grow at a 34% CAGR over FY2008-10, driven by a CAGR of 40% in the generic segment and a 29% CAGR in the branded formulation business.
Strong earnings growth: We expect Glenmark's consolidated revenues to grow at a 31% CAGR over FY2008-10 to Rs3,377.7 crore, driven by a 34% CAGR in the core business and a $60-million milestone income in each of the two years. A robust growth in the top line would lead to a 26% CAGR in the consolidated profits over FY2008-10 to Rs994.8 crore. We expect the core net profit to expand at a higher rate of 37% over the same period to Rs774.0 crore in FY2010.
Valuations: We have used the sum-of-the-parts methodology to value Glenmark's core business and discovery R&D business. Assigning a PE multiple of 18x to Glenmark's fully diluted core earnings of Rs30.6 per share in FY2010E, we value Glenmark's core business at Rs550 per share. Using a probability-based DCF approach, we value Glenmark's three lead molecules at Rs204 per share, which takes our total fair value for the company to Rs754. We initiate coverage on Glenmark, with a Buy rating and a sum-of-the-parts based price target of Rs754; that is an upside of 26% from the current levels.
STOCK UPDATE
Thermax Cluster: Emerging Star Recommendation: Buy Price target: Rs602 Current market price: Rs375
Huge order win allays slowdown fears
Key points
Thermax has announced its largest order win ever, valued at Rs820 crore (that is 31% of its current backlog) for the supply of a coal fired boiler to a captive cogeneration plant of a refinery. The boiler is expected to generate 390 megawatt of electricity.
Thermax would manufacture the coal fired boiler under the technology licence with Babcock & Wilcox (B&W). We believe that the current order may be executed jointly by Thermax and B&W in order to enable the indigenisation of the technology. Under the agreement, Thermax would be required to pay royalty and an upfront fee to B&W.
Of late, the biggest area of concern for Thermax has been the slowdown in its order inflow, as is evident from the Q4FY2008 order backlog of Rs2,637 crore vis-à-vis the order book of Rs3,100 crore in Q4FY2007. The latest order may provide some respite as far as the concerns over a slowdown in the order inflow are concerned. We expect a gradual pick-up in the company's order inflow in future as clients are expected to finalise the pending orders.
Though the visibility of the company's revenues has increased with the latest order win, the rising input cost continues to pose a risk to its operating profit margin and to its earnings as a result. The concerns are valid. However, Thermax carries 70-75% of its order backlog on a fixed price basis for which it ties up raw material supplies as soon as a contract is won. This provides protection to the margins of the company.
The stock price of Thermax has been under pressure lately because of concerns over its slowing order inflow and rising raw material cost that could adversely affect its earnings. We have factored in a slower growth in orders as well as earnings for FY2009 and expect Thermax to report a 24.2% compounded annual growth in its earnings over FY2008-10. We believe that at 12.2x and 10x FY2009E and FY2010E earnings, the stock is attractively valued. We continue to recommend a Buy on the stock with a price target of Rs602.
