Friday, November 14, 2008

Stock Tips: Accumulate Glenmark: Kotak

Kotak Securities has maintained its Accumulate rating on Glenmark Pharmaceuticals with a target price of Rs 557.

A report released on November 10 said: "We expect fully diluted EPS of Rs 31.1 and Rs 40.2 for FY09 and FY10, respectively, assuming US$ 70mn income from NCE out-licensing deals each in FY09 and FY10, respectively. The EPS from core business is expected to be Rs.23.3 in
FY09 and Rs.32.4 in FY10.

"The stock has witnessed sharp sell-off in last few trading session on the news of
suspension of further clinical trial by Eli Lilly on Osteoarthritis pain molecule
GRC-6211 and sharp correction in the overall markets.

"At current market price Rs.306, the stock is trading at 9.8x FY09 and 7.6x FY10
fully diluted earning estimates.

"We use Sum-Of-The-Parts method (SOTP) to value the stock, valuing the R&D
deals and the core generic business separately. We believe probability-adjusted
DCF is appropriate to calculate the option value from NCE compound as it captures
the reducing probability of success as the molecules progress on the clinical

"We have valued the core business (excluding R&D income) at Rs 389 (earlier
Rs 359) attaching 12x price-to-earning multiple to FY10E fully diluted earning
and an option value IP Assets at Rs 168 (GRC 3886 at Rs 119 and GRC 8200 at
Rs 49). We have removed option value Rs 104 for GRC 6211 from our total NCE value. Hence, we arrived at target price of Rs 557.

"We believe that valuations are attractive and many potential catalysts still exist
in the stock viz, expected milestone payments, potential out-licensing deal for
GRC-3886 (Olgemilast) to European region and potential out-licensing deals for
GRC-8200 (Melogliptin) and other new molecules. We maintain ACCUMULATE."

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