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| STOCK UPDATE Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs760
Current market price: Rs679 Price target revised to Rs760 Key points -
We interacted with the management of Bank of Baroda (BoB) to understand the impact of the weak macro environment on the bank's asset quality as well as the business growth of the bank. The management has guided for slippages of around 1.3-1.4% in FY2012 on the back of conservative lending and strict monitoring of loans. The credit proposals have declined significantly in the first eight to nine months (FY2012) due to higher interest rates and slower economic growth. The credit (global) is likely to grow at the rate of 19-20% in FY2012 with the overseas book growing at a slightly higher rate. Unlike the other public sector banks (PSBs), BoB's asset quality has remained stable but going ahead the sharp deceleration in the economic growth and sector-specific issues (power, aviation etc) could increase the non-performing assets (NPAs). In addition, the Shunglu Committee's recommendation for restructuring of state electricity board (SEB) loans and speculation of farm debt waiver could stress the valuations of banks. Therefore, we will downgrade the estimate and valuation multiple of the other PSBs also. We have reduced our earnings estimate for FY2012 by 4% and that for FY2013 by 5% after factoring the higher credit cost. We have also revised our price target downwards to Rs760 (1.1x FY2013 book value [BV]) by reducing the valuation multiple to 1.1x (1.2x earlier). However, post-correction the valuation has turned reasonable and hence we maintain our Buy rating. Glenmark Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs404
Current market price: Rs296 Legal tangle on Crofelmer Key points -
Napo declares to terminate agreement with Glenmark on Crofelmer: Napo Pharmaceuticals Inc (Napo) has sought to terminate the agreement which was entered in July 2005 with Glenmark Pharmaceuticals (Glenmark) relating to Crofelmer, on the ground that Glenmark has failed to start regulatory filings and commercialise the product as per schedule despite the completion of phase-3 trials last year. In response, Glenmark has filed a statement of claims to American Arbitration Association against Napo seeking a declaration about Glenmark's right to develop, commercialise and distribute Crofelmer in 140 countries. Although Glenmark is confident to pass through the case and continues to work on molecule with a target to launch it within 15-18 months of regulatory filings, we believe the legal battle may either delay the product launches or the agreement may be terminated by court in a worst case scenario. -
The legal tangle seems to be complex: The sequence of events which revolve around Crofelmer involve Glenmark (which holds the license for development and commercialising the product in 140 less regulated countries), Salix Pharma, USA (Salix; which holds a similar licence for regulated markets and has a separate agreement with Glenmark as well for API supplies) and the primary proprietor of molecule, Napo. Napo now wants to terminate agreements with both Glenmark and Salix for non-compliance of terms of agreements (mainly on the grounds of delay in regulatory filings). The products were allowed fast track approval process, given their high demand in HIV infected areas. Napo is claiming damages exceeding $150 million and seeks a declaratory judgment entitling Napo to terminate the collaboration agreement with Salix. Although, we do not expect any pay back by Glenmark, the complex legal battle raises acute uncertainties. -
We take a conservative stand to exclude value from Crofelmer: The sequence of actions and counter actions by litigating parties and Glenmark's failure to register the products even in less regulated markets indicates possible delays and that brings uncertainties over the launch of this product. We prefer to take a conservative view about the launch of products in FY2013 and therefore exclude Crofelmer from the research and development (R&D) pipeline from the valuation points of view. Accordingly, our discounted cash flow based valuation of the R&D pipeline of Glenmark would get reduced by Rs21.8 to Rs41.9. -
Maintain Buy with a reduced target price: We reduce our target price by 5% to Rs404 to factor the exclusion of upsides from Crofelmer. Our target price represents Rs42 per share for the R&D pipeline and Rs362 for the regular pharmaceutical business (16x FY2013E core earning per share [EPS]). However, we maintain our Buy recommendation on the stock given the strong traction in its generic and branded business in regulated and less-regulated markets respectively. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | |
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