Glenmark Life Sciences (GLS; Glenmark Pharma’s 100% subsidiary for API or energetic prescription drugs substances) filed a draft crimson herring prospectus (DRHP) on 16 April 2021 with SEBI for an IPO, comprising a contemporary concern of as much as Rs 11.6 bn and a proposal on the market of as much as 7.31m shares (potential complete proceeds of c$210 m). The IPO will likely be topic to market situations, requisite approvals and different issues, per the corporate. The majority of IPO proceeds will likely be used for cost of excellent buy consideration to the promoters for the spin-off of the API enterprise, and capex funding.
Potential value-unlocking occasion however many unknowns: GLS reported gross sales of Rs 10.2 bn in FY20 (9.6% of GNP’s complete revenues, FY17-20 CAGR of 8.2%), although 9MFY21 gross sales at Rs 8.8 bn have grown 14.9% yoy, totally on robust buyer demand. A profitable IPO by GLS would assist GNP in worth unlocking for the API enterprise the place the demand outlook stays sturdy. Nevertheless, many unknowns stay for the API enterprise given the current robust efficiency was pushed by COVID-19-led greater demand and buyer stocking to a big extent, in our view.
Furthermore, Chinese language producers have maintained their dominance within the world API market and any potential market shift to different areas might occur very progressively. Whereas market progress alternatives stay, company-specific (e.g. GLS) advantages can be decided by scale, product portfolio, price competitiveness, buyer relationships, GMP compliance information, and many others. Valuation-wise, we observe that similar-sized API firms – similar to Solara Energetic, Aarti Medicine, and many others – are valued at 18-20x FY22e consensus PE.
Retain Maintain with unchanged TP of Rs 550: The potential IPO proceeds from GLS might assist GNP in debt discount (with internet debt of Rs 36.4 bn and internet debt/Ebitda of 1.75x, GNP stays one of the leveraged names in our protection and it has seen very sluggish progress in debt discount). It’s presently buying and selling at 15.3x/13.6x FY22e/23e our EPS estimates, vs a three-year common PE of 16.1x.
Whereas we see ample headroom for a possible valuation re-rating, we expect it must be backed by improved execution on US gross sales and debt discount to enhance investor sentiment and administration’s execution document. We retain our truthful worth TP of Rs 550 and Maintain score for GNP as we search for seen enchancment in execution.