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Glenmark shares gains 10% in less than a month

The loss of gZetia, high R&D cost and leveraged balance sheet impacted the stock performance in FY18. The positive news flow on the stock over the past three years has seen improvement in the investor sentiment.
The positive news flow has continued on Glenmark owing to which its shares have gained by ~10% since 27 March 2018, when company received an approval for a product filed from Baddi. The stock currently trades at 11.8x FY20E EPS, which is an attractive valuation.

The slide in Glenmark’s shares had started in May 2017 as company missed the street estimates in Q4FY17 results. The continued drop in the US base business, slower ANDA approval, no replacement for gZetia and observations on Baddi plant in November 2017 has led to keep the stock under consistent pressure throughout FY18. Additionally, company reported weak results for first three quarters of FY18 owing to the pressure on gZetia.

In 3QFY18, sales declined 13% while margins were at 14.6%. Management has indicated that revenue and margins should recover Q4FY18 onwards and Q3FY18 marked the end of the bottom of revenue/margins.

The pressure has eased some bit now as the company has got USFDA clearance to its Baddi plant. Management expects new out licensing deals to play out over next 12-18 months. The company has also taken some cost reduction measures and plans to reduce the debt by ~Rs300cr, which should relieve some stress on balance sheet.

Today, company has reported final USFDA approval for gProtopic, which is a low competition drug and should benefit the company to recoup some of its base business in the US. Owing to the positives in the past three weeks, the shares have rose by ~10% in less than a month. We have a BUY rating on the stock (read IIFL view) with price target Rs638.