In the process of Nirma’s takeover of Glenmark Life Sciences (GLS) from its promoters Glenmark Pharma (GLP), an open offer to public shareholders will be made from February 15 to 29. With GLS trading at ₹866 on February 13, owing to a turnaround in industry scenario, the open offer price of ₹631.20 should not interest investors and is a non-issue. What existing investors should rather focus on is the scope for future growth in GLS.

Timeline to acquisition

GLS made a public announcement of open offer on September 21, 2023 following Nirma’s bid to acquire 75 per cent of GLS. On the same day, Nirma entered into a share purchase agreement with GLP at ₹615 per share (subject to regulatory approvals). On completion of the transaction, Nirma (the new promoter) should hold 75 per cent and GLP shareholding will come down from 83 per cent to eight per cent in GLS.

Stock prospects

The open offer price meanwhile has not been revised from September to now, including the draft offer in October 23. The stock though has rallied 35 per cent since the public announcement, primarily owing to a turnaround in API business outlook, resolution of supply issues, stability in purchases of GLS products by GLP and building momentum in CDMO operations.

Compared to 17 per cent Y-o-Y revenue CAGR in FY20-22, the topline growth slowed to 1.8 per cent YoY in FY23. Covid portfolio slowing and inventory build-up in regulated markets trimmed high growth prospects for GLS.

EBITDA margin remained stable throughout the period though at around 30 per cent in FY20-23.

In 9M FY24, GLS reported a 13 per cent Y-o-Y growth. The US pricing pressure eased, and volume recovery was gradual in the period as inventory stocking eases. GLS has added 400 KL capacity which on hitting full utilization in FY25 will sustain mid-teens growth in FY25 for GLS’ API division (90 per cent of 9MFY24 revenues). Supplies to parent GLP’s operations earlier contributed 50 per cent of sales for GLS, declined to 25 per cent in the last two years as GLP also faced slower sales growth. As parent company sales bounced back, this proportion bounced back to 40 per cent and GLS expects to sustain a third of its sales from GLP. The company has a five-year agreement with GLP for supplies after the take-over.

CDMO (contract development and manufacturing organisations) is the other division for GLS. The segment servicing three client molecules can expand to three more in the next one-two years, doubling its revenue contribution. The segment is in early stages and can scale up products or client wallet share in the long run.

The EBITDA margin in 9M FY24 has gained from easing cost of intermediates/starting materials as China increases supplies in India. The raw material price savings have been offset by higher employee expenses which are expected to be one time. Even if commodity price savings eases in next two years, employee expenses reverting to normal will sustain EBITDA margins at 30 per cent in FY25.

We had earlier recommended subscribing to the IPO (July 2021) and reiterated the buy call in Nov-2022 from where the stock has more than doubled. API operations stabilizing and a strong growth lever in CDMO operations reaffirm growth visibility in GLS apart from reasonable valuation of 18 times FY25 EPS . We recommend investors hold the stock till the new promoters spell out a new strategy and start delivering on the same.