Hold Glenmark Pharma; target Rs 580: Sushil Finance

Sushil Finance's research report on Glenmark Pharma

Glenmark Pharma has reported Q2FY14 results in line with expectations at the operating level, but higher depreciation (due to CWIP getting capitalized & amortization of new products launched) and tax rate hurt net profit. The company’s top line increased by 16.6 percent YoY whereas PAT witnessed a growth of 8.8 percent on a YoY basis to Rs. 1543 mn.

Revenue grew by 16.6 percent whereas EBIDTA & PAT grew by 23.1 percent & 8.8 percent. The company received a milestone payment of Rs. 118 mn from forest labs during the quarter. EBIDTA Margins came in at 21.6 percent (20.8 percent excluding milestone payment) vs 20.4 percent in Q2FY13. EBITDA is expected to see an improvement with the full impact of currency expected in H2FY14. Management confident of exceeding its EBITDA guidance of Rs. 1225 crs in FY14E. EPS in Q2FY14 came in at Rs. 5.7

Specialty business grew 9.7 percent led by India 21 percent (Expected to continue to see high growth in H2FY14 & FY15 led by new product launches & strong base business) & Europe 39 percent. ROW de-grew 10.5 percent (Growth slow in value terms coupled with lack of product approvals, currency pressure & challenging market. FY14E growth to be 13-15 percent led by strong Russian/CIS winter season) & Latam de-grew 2.5 percent (due to challenging operating environment with slow product approvals due to change in regulatory process, Brazil to continue to struggle in FY14E. FY14E growth to be around 20-25 percent led by Mexico & Venezuela).

Generics grew 22.5 percent led by US 29.5 percent (CC growth 15 percent with ramp up expected in filings in niche areas with 8-10 launches per year out of which 3-4 would be big product launches. FY14E growth maintained at 15-18 percent) and Europe 33 percent. Tax rate guidance increased to 22-23 percent for FY14E with it expected to come down next year led by shifting of some operations to Indore SEZ. Current Net Debt at Rs. 25800 mn from Rs. 21450 mn in FY13 led by currency revaluation. CC net debt at Rs. 21350 mn. The company is on course to repay some loans in H2FY14E with debt maturities worth Rs. 300 crs in current liabilities. R&D cost increased to 9.5 percent of sales from 8.5 percent in FY13 led by ramp up in filings like Derma, OC etc. Crofelemer to take time to see a ramp up with expected launch from Glenmark to be in H2FY15E in some markets.

OUTLOOK & VALUATION: "Glenmark registered strong revenue growth for the quarter with strong performance in markets such as US (29.5 percent) & India (21 percent) whereas ROW (-10.5 percent), Latin America (-2.5 percent) registered de-growth. We expect the growth momentum to continue, driven by consistent growth in its domestic business, the launch of FTF products and increased traction in existing products in the US market & continuous recovery in Latam and other semi-regulated markets. We, however, downward revise our EPS estimates for FY14E & FY15E on the back of higher depreciation & tax rate even though we have increased our EBITDA margin estimates (margins will benefit if the rupee stays at 61/62 level against the US dollar in 2HFY14). We continue to recommend Hold on the stock with a TP of Rs 580 (18x FY15E EPS of Rs.32.2). More out-licensing deals, milestone payments and the successful launch of Crofelemer would act as an upside risk to our estimates," says Sushil Finance research report.

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