| Summary of Contents STOCK UPDATE Glenmark Pharmaceuticals
Recommendation: Buy
Price target: Rs600
Current market price: Rs520 Price target revised to Rs600 Key points -
Agreement with Forest Labs to fetch $9 million in revenues: Glenmark Pharmaceuticals (Glenmark Pharma) has entered into an agreement with Forest Laboratories Inc (Forest Labs) to develop novel mPGES-1 inhibitors to treat chronic inflammatory conditions, including pain. Under the terms of agreement, Forest Labs will make a $6-million up-front payment and provide an additional $3 million to support the next phase of work. Forest Labs will make other future payments in FY2014 to support the ongoing mPGES-1 inhibitors programme. This programme is currently under pre-clinical trials. We consider it an important development for the company having positive repercussions in the long term. -
Strong performance in branded generics business continues: Glenmark Pharma has posted an impressive growth in the domestic branded formulation business (a revenue growth of more than 25% in the 12 months ended November 2012, as per the secondary sales data), mainly boosted by the cardiovascular and the respiratory segments. Growth in other geographies is also expected to grow more than 20% on account of new product launches in the niche segments. -
We introduce FY2015 estimate; roll over valuation to average earnings for FY2014 and FY2015; maintain Buy with a price target of Rs600: We have fine-tuned our estimates for FY2013 and FY2014, taking cues from the recent performance of Glenmark Pharma in the domestic market and stronger research and development (R&D) pipeline. We have also introduced earnings estimate for FY2015 in this copy and rolled over our price target to average earnings for FY2014 and FY2015. Our revised price target of Rs600 includes Rs89 for R&D pipeline and Rs511 for Glenmark Pharma's core business (15x average earnings for FY2014E and FY2015E).
SECTOR UPDATE FMCG Falling palm oil prices positive for soap makers Key points -
Malaysian palm oil stock rises on account of lower exports: The Malaysian palm oil stock increased by 2.6 million tonne on a year-on-year (Y-o-Y) basis to 23.0 million tonne over the period of January-November 2012. This was largely on account of lower exports to some of the key exporting countries (including China, the USA and Pakistan). The palm oil exports were down by 3% year on year (YoY) with China's exports declining by 14% YoY to 3.2 million tonne over the same period. -
Palm oil prices corrected from the high: The increase in inventory levels has led to a correction in the palm oil prices in the recent past. The Malaysian palm oil is currently trading close to Malaysian Ringgit 2,100 per tonne, which is 30% lower than the previous year's price. The prices started correcting from May 2012 but the correction was significant from September 2012 onwards, as inventory levels were inching up due to lower exports (refer the tables below). -
Malaysian government slashes tax on palm oil exports: The Malaysian government has decided to withdraw the tax-free export quota for crude palm oil and introduced a new export tax structure that is set to take effect from January 1, 2013. The government will set a tax rate for the export of crude palm oil for January 2013 by using the average sales price from November 10, 2012 to December 9, 2012 as the reference price. This turns out to be zero tax for importers. The government will announce the tax levy on the 15th of every month using the Malaysian Palm Oil Board prices. -
Positive for soap and detergent manufacturers in India: Palm oil accounts for around 20-30% of the raw materials for some of the FMCG companies in India. The declining palm oil prices and the revised export tax structure would improve the fundamentals of many fast moving consumer goods (FMCG) companies (largely soap manufacturers) in India as these companies import palm oil largely from Malaysia. Large soap manufacturers such as Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd (GCPL) import palm oil to meet their large requirements for production of soaps and other personal wash products. This would result in better profitability for these companies in the coming quarters. Any further decline in the prices of palm oil and the other inputs essential for manufacturing soaps and detergents would provide us an opportunity to upgrade the earnings estimates and price targets for the FMCG companies under our coverage.
Further, the decline in the prices of palm oil at international levels and the increased import of Malaysian palm oil by India would affect the prices of palm oil at the domestic level. Hence, it will be beneficial for the other FMCG companies that have palm oil as one their key inputs and procure domestically.
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