We believe the recent stock correction in Glenmark offers favourable risk-reward —limited downside while potential US recovery will drive upside. In addition, the currency tailwind will allow the company to normalize its balance sheet while delivering stable P&L growth — which has been our key concern. We believe concerns about US Dollar debt are manageable, given actual debt repayment in the near term is limited. We upgrade Glenmark to add (from reduce) with target price of Rs 570 (from R535); we value the stock at 18X one-year forward EPS.
Glenmark stock has turned attractive on a relative basis following the recent stock correction — the stock trades at the lower end of the sector valuation (15.3X FY2015 EPS versus 18-22X for large-cap. generics). The company is also less impacted by the drug-pricing policy in India. Glenmark’s strong US performance over the past two years has been driven by the launch of niche products — dermatology and oral contraceptives. Structurally, we expect the OC segment to remain competitive (with the entry of Lupin/Mylan) while dermatology launches may hold the key to sustainable growth in the US.
Glenmark has $490 million in US Dollar-denominated loans, which will lead to higher reported net debt numbers (in rupee terms) in the near term.