Your query is valid. Yes, it looks like having your cake and eating it too -but this is the playbook for virtually all demergers/spinoffs and its entirely legitimate. But there is no double consideration. Look at this way- on day 0, GP owned both 100% shares in GLS as investment as well as the API business as assets. On day 1, it sold the API business to GLS. It means the value of API assets in its books went down but value of its investment went up. This is how unlocking of value looks like and how it works. API biz which stood at 1162 crs in its books, had lot of hidden value which has been unlocked through the IPO with a value of ~8700 crs when it was separated and selling 18% of that was enough to recover its dues. (as an aside, if GLS had paid off its dues before the IPO, this question would never have come up). I hope this clarifies your doubt.
Thanks a lot for the explanation.
Having read more about how a slump sale transaction works ie. transfer of all assets / business to another entity for an agreed upon consideration. That consideration could be the book value of assets or fair market value.
And given the 2019 balance sheet of GLS, the transaction does appear to be at book value of assets.
Hence, I’m quite satisfied for now 
Thanks again!
Would appreciate if anyone with the subscription can summarise this article.
Thanks for the details @FIRE40 . I am keenly looking at this stock. Most of the positives have been summed up like their key product portfolio/addressable market, no warnings from regulator over a fairly long history, High ROCE, No Debt etc which makes it quite an attractive play to me particularly at current valuations.
However, in my ongoing research few points of concern or further study remain. Would be glad if others have come across any inputs on these:
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The consideration of 1162 cr paid to Glenmark: Can be a standard value unlocking play like most demergers are and particularly now that the assets seem to be at book value which assures me a bit. What raises concerns is the not-so-good history of its parent. Again a lot has been commented on this below so will not dwell on this.
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Possibility of getting a minority investor in GLS?: I found this interesting article from 2019 (Debt-laden Glenmark counts on assets sales, spinoffs to dig it out) which says that Glenmark is “still in discussions for a minority investor in API" . Now obviously the API business is GLS today so has the minority investor been brought in through this IPO (i.e. retail and institutional investors) or is further equity dilution planned? Logically a further equity dilution would indeed help pare down the debt at the parent Glenmark (and it is indeed loaded with debt) since the consideration for sale would go back to it. It also seems to me that the 1162 crores (mentioned in point 1 above) may also be an attempt to lay down a marker about the separation between Glenmark and GLS and benchmark valuations in preparation for further equity dilution in the future (maybe not too distant future also)
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Is the company’s moat credible: In my view it seems its play in the high-value non-commoditised APIs along with its decent market share is the moat here. But have not found any details about long term contracts which would be key in the highly competitive space that the company operates.
The details on new product launches also seems a bit scanty. The management has mentioned 8-10 products in a couple of years which honestly seems ambitious but details on the nature of these new products seems a bit hazy.
The recent quarterly results indicated that EBIDTA margin declined 415 basis points year-on-year (down 580 basis points sequentially). Again this indicates a competitive market for GLS and hence having a credible moat becomes very important. -
Ability to fund expansion: The IPO aims for financing for its brownfield expansion and has raised sufficient funds for the same. The company also plans to come up with a new 800 KL greenfield facility in Solapur, Maharashtra, to be fully operational in the next three to four years. Now this is really attractive for growth of GLS but my concern is that this facility will require an investment of Rs. 600-800 crore. How will the company finance this? Is there any information available about this or is the company completely dependent on internal accruals? GLS generated a free cash flow of approx. 200 crores last year so my sense is that GLS would be running up some debt in the coming year to acquire funds to set-up this facility
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Quality of Management: The details of Dr Yasir Rawjee have already been provided. Looking at the patchy record of its parent would love to know more about the pedigree of its senior management and R&D head. Again Glenmark’s history is the one raising questions here although GLS (as a standalone entity) per se does not have enough of a historical track record to comment much on management quality
Discl: Started Investing in bits and looking to build a position in GLS. Still researching on this stock
@Dev_S has already very well summed up the Q1FY22 concall notes, thanks for that. I just listened to the concall and wanted to add some specific notes.
Brownfield expansion well underway, 4 modules being built at Dahej facility, 1st module will be operational by Q4FY22 and all 4 modules are expected to be operational by Q2FY23.
Greenfield expansion expected to be started by Oct-Nov, will partially start getting operational by Q4FY23. Have significant business coming from emerging markets which will be executed from the greenfield site. See big opportunity in emerging markets like Brazil, Mexico Korea, Taiwan, Russia as authorities in these markets are becoming more stringent.
Significant sale of favipiravir in this quarter, without it 27% growth in revenue.
Expect margins and ROCE to sustain due to differentiated and non commodity nature of portfolio and focus on regulated markets. Don’t want to gain market share at the expense of margins as they feel they enough depth in the products which will help them avoid such a scenario.
They do face Price and margin pressure but able to move the customer to next gen process which helps them deal with pricing pressure. This would also insulate them from the whole sartan issue. Also effectively they have to deal with only 2 sartans. As molecules mature their margin profiles tend to dip, these base molecules which were launched more then 4-5 years ago typically have lower margins than the company’s average margin profile. So the company launches newer molecules which have higher margin, so here process innovation is the key to mantain margins.
RnD spend was just under 2% of revenue this quarter, expect it to be between 2-3% going forward.
5 top moecules today may not be the top 5 molecules next year as new molecules will keep adding to growth. Aim to add 3-4 molecules every year. Looking to introduce more complex modules which are higher value molecules in the next few years. Current top moecules are (assuming I got the pronunciation right, this is at 30 min mark in the concall):-
Rosuvastatin
Olmesartan
Atovaquone
Perindopril
Telmisartan
Oxcarbazepine
Here is a link to the product list of the companies (including the ones under development).
https://www.glenmarklifesciences.com/pdf/Product-List_January-2021-(150421).pdf
@achin_b Given the timeline for the greenfield expansion I don’t see how all of it can be financed by internal accruals, so at some point they might need to raise debt. I also have some reservation regarding the parent glenpharma’s track record and debt. Given that they still hold 82.8%, the parent might very pare down the stake to bring down the debt. So these factors are preventing me from building a higher position here. But overall, after listening to the concall, I feel positive about the company. At current PE of 23-24, it does seem tempting but as @Dev_S pointed out markets might be looking for performance visibility and along with the parent debt and uncertainty on greenfield expansion financing the market doesn’t seem to be “impressed”
Disc:- Tracking position, still researching/studying the company. Not an investment advice.
The feature of Glenmark’s management is that they have always been over-ambitious, which had resulted in capital mis-allocation / debt issues in the parent. In the parent, the main issue was allocation towards drug discovery vertical. Here, they may go over-board with the capex and launching of new APIs.
I can understand why they are planning to get aggressive with new launches of APIs. Niche APIs have bigger margins but lower volumes and so for continuous growth they need to grow their portfolio of APIs.
Given their slated inclination towards niche APIs I don’t know how they can benefit from China + 1 strategy when China was mainly in to commodity APIs.
Are they planing to launch some commodity APIs? I believe that will be beneficial for the company’s prospect if they manage to become a low cost manufacturer after doing necessary backward integration. I am saying this because they may not go too far with focus only on niche APIs.
Divi’s, Neuland, Solara don’t plan to enter formulations as they don’t want to compete with their API / CDMO customers, and that helps them to earn trust and more business. GLS is a subsidiary of Glenmark Pharma, and so it neither can earn that level of trust, nor can start its own formulation business. So, in my opinion, GLS should trade at lower multiples compared to those famed competitors.
Some anti thesis pointers
What are those niche molecules that they are going to produce (the pdf link is not working ), most of these are produced for parent ? Since most of their current business is from parent so I am assuming this.
All these generic molecules what kind of cost advantage that they have where they can maintain high margins ?
Why would an innovator give them an opportunity where as their parent is into formulations ?
Please share your thoughts
With respect to key products, I found the above information from DRHP. Not sure what percentage of each product is supplied to non parent companies. The link in the previous post works now.
They develop the api themselves and it is upto the customer wether they want to buy from gls or a pure play play api player.
The rate of growth in business over last 2 yr shows that they are well accepted and that confidence is also reflected in capex
Secondly 40 % is assured buss from parent which helps
Disc: invested in glenmark pharma
Glenmark Pharma revenue grew at an annual rate of 7.5 per cent over the last five years while net profit compounded at just 5.5 per cent. ROCE averaged at 17 per cent in this time. It spent a lot of time and investment in NCE development without meaningful commercial success.
DCGI pulls up Glenmark for false claim on Favipiravir
Glenmark charged in antitrust case for manuplating prices (along with Sun pharma, Lupin, Aurobindo and Wockhardt)
Do Not confuse GLS with Glenmark Pharma.
its a premium article…can yu summarise whats the content in the article pls.
Update on my research and position on GLS.
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Moat/Long term contracts (ref to my earlier post) : Found an India Ratings Report for GLS dated Nov 2020 (India Ratings and Research: Most Respected Credit Rating and Research Agency India) which confirms that “Although GLS does not have long-term contracts, its relationship with most clients extends for over five years”. The report has some other relevant information also, although most of it was in the IPO offer document.
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Current investment: I have now taken a significant position (although still not pre-dominant ,about 3% of PF) in GLS. My take is that GLS will trade at a small but significant discount to the other established API players in the pharma space due to the parent group overhang and some other minor issue which nevertheless add up to decide the overall stock movement.
However I decided to invest because, the valuations became very compelling (in my view) due to the fall over the last few days even accounting for the discount I believe that it will operate at. Added to this are other positive triggers that have been spoken about in this thread and which I believe can kick-in in the coming quarters to make valuations stronger. Will still be closely tracking next quarters to see how the results come and may add-on more accordingly. -
Investment drivers: I will be keenly looking at
a. how the relationship between GLS and its parent pans out (I am guessing that an arm’s length will be maintained as Glenmark would not want to compromise a good business which has potential to further lessen its debt burden)
b. capacity addition and order book generated from brownfield expansion
c. Standard indicators like management quality, product pipeline (can new launches keep pace, CDMO business foray) etc.
Thanks for sharing this article. An interesting point in it is about valuation of GLS CDMO business. Is there any reason why GLS is not able to ramp up the CDMO business quickly? I know the new greenfield expansion is required but are there other reasons when other companies like Syngene is able to get more CDMO business?
China problems increasing prices of KSM and impacting supply as well for API industry
This seems like a more industry wide issue (although I can understand that the GLS CEO is front ending the questions here). See link below. It makes sense also that power shortages would have a pretty secular effect.
Some margin pressure seems inevitable , now it would be interesting to watch the next quarter results and see which API makers have managed to navigate this with minimal fall in margin basis points. That may be a good indicator of their strength in the market (and indicator of some moat against competition)
Yes, I am also looking forward to see how all companies are handling this which will be clear in Q2 & Q3 results.
In the current quarter, what was the extent of related party (parent) sales - have they given the figure?