Glenmark Pharma Shares Surge 10% On S&P Rating Outlook Upgrade

S&P revised its outlook to 'positive' from 'stable' as the stake sale in its lifescience unit will strengthen its financials

<div class="paragraphs"><p>Source: Unsplash</p></div>
Source: Unsplash

Shares of Glenmark Pharmaceuticals Ltd. surged over 10% on Friday after S&P Global Ratings revised its rating outlook as it plans to sell a stake in its lifesciences arm.

The ratings agency affirmed its 'BB' long-term issuer credit rating on the company while revising its outlook to 'positive' from 'stable.'

The company's decision to sell a stake in Glenmark Lifesciences Ltd. could deleverage and strengthen the company's financial position, according to a S&P Global Ratings note.

Glenmark Pharma is likely to maintain resilient operations despite the stake sale, while its Ebitda should recover to the fiscal 2023 level over the next 12–24 months, absent any significant remediation costs, the ratings agency said.

The ratings agency said that its positive outlook reflects the view that it could raise ratings upon successful debt repayment. It added that debt reduction will more than offset the company's weakened business position following the divestment.

Glenmark will be selling its 75% stake in Glenmark Lifesciences to Nirma Ltd. for Rs 5,650 crore. The company had about Rs 4,440 crore of debt outstanding as of June 30, 2023.

The ratings agency believes that the company will use proceeds from divestment to repay debt, given that the pharma company has no acquisition plans over the next two years while looking to reduce its finance costs in the current environment.

Thus, it will have net cash on a reported basis.

However, the company's earnings base is likely to shrink following the transaction, as Glenmark Lifesciences contributed 10–12% to the company's revenue and 25–30% to its Ebidta in the past two years. But debt reduction is likely to more than offset the earnings impact.

"Ebidta margins should average about 18% by fiscal 2025. Accordingly, we expect the company to generate positive discretionary cash flow in fiscal 2025," S&P said.

A reduction in debt will be imperative for a sustained improvement in the company's credit profile, and given the company's volatile credit metrics over the years, a commitment to a disciplined financial policy will also be essential for a higher rating, the report noted.

Downside Risk:

S&P Global Ratings cited that if Glenmark Pharma were to use proceeds for purposes other than debt reduction—its earnings would weaken materially beyond expectations—adopt a more aggressive financial policy to focus on growth investments and shareholder distributions or fails to complete the transaction, then they may revise their outlook back to stable.

What Nirma Gets From Buying Glenmark Lifesciences

Separately, another rating agency, Crisil Ratings, has placed Glenmark Pharma's long-term bank facilities on 'Rating Watch with Positive Implications'. The rating on the short-term bank facilities has been reaffirmed at 'CRISIL A1+'.

Shares of the company were trading 10.33% higher at Rs 858.30 at 2:35 pm on Friday, compared to a 0.94% rise in the benchmark S&P Sensex.