Focus on debt reduction: GNP remains one of the most levered names in our coverage universe with net debt/EBITDA of 1.7x as of FY21. It has made a little progress over the past few years to achieve a meaningful debt reduction and this remains an overhang. As of FY21, its net debt stood at Rs 35.5 billion, a reduction of Rs 2.1 billion versus FY20 (net debt was Rs 34.3 billion as at 1QFY22). Long-term debt (excluding other financial liabilities) of Rs 2.9 billion is due for repayment in FY22 and total debt of Rs 42.2 billion is maturing over the next four years. GNP is aiming for total debt reduction of Rs 15-16 billion in FY22 with Rs 12 billion proceeds from the IPO of Glenmark Life Sciences. (GNP’s subsidiary engaged in API business) and Rs 4 billion of expected operating cash flows.
Pipeline assets deals could ease R&D burden: GNP had spent Rs 60.6 billion (12.4% of revenues) on R&D during FY17-21 (11.3% in FY21) with ~55-60% spend on innovation R&D and 40-4 5% on generic products. The impact of high R&D spend is reflected in its range-bound operating margins in the mid-to-high teens. While it expects R&D spend to continue for future growth drivers, it is working to optimise costs (including partnering deals for pipeline assets). GNP has reduced spending on Ichnos Sciences (its 100% subsidiary engaged in innovative R&D) to $102 million during FY21 from $116million in FY20. A successful outcome from ongoing discussions for partnering deals for Ichnos pipeline assets (potentially ISB880 and ISB830) and/or a capital raise by Ichnos could help it to ease its R&D burden. However, the timeline remains uncertain for these deals.
Maintain ‘hold’ with revised TP of Rs 610 (from Rs 645): GNP is currently trading at a PE of 14.1x/13x based on our FY22/23 EPS estimates versus the 3-year/5-year average PE of 15.3x/16.7x. While it could see multiple potential catalysts in the next 12-15 months (e.g. pipeline assets deal for Ichnos, FDA approval of Ryaltris, key data readouts from pipeline assets), we believe any valuation re-rating is largely dependent on notable improvement in operating margins and debt reduction. After huge benefits from COVID-19-related sales in 1QFY22, we expect its India sales growth to settle at low-to-mid teens. New launches in the US had helped to stabilise sales in recent quarters; however, we remain watchful for higher pricing erosion concerns in the US. Management delivery on debt reduction goals and pipeline R&D asset deals will be key to improving investor sentiment, where progress has been very slow in the past. We adjust our estimates to reflect the current outlook which leads to a 5-9% cut in our FY22-24e EPS estimates.
We roll forward our valuation to September 2023 from June 2023, which leads to a revised fair value TP is Rs 610 (from Rs 645).