Glenmark Pharma- Buy: Growth Is Back, B/S Better – Raise TP to Rs395:: Citi

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Glenmark Pharmaceuticals (GLEN.BO)
Buy: Growth Is Back, B/S Better – Raise TP to Rs395
 Raise TP to 395 — 2Q was good on almost all fronts, with positive surprises on
the topline & balance sheet fronts. Growth appears back on track in most key
markets & debtor days declined further. Although margins disappointed (currency
& higher R&D), prompting us to lower FY11/12 estimates by 13%/4%, we believe
the biz has turned the corner. Maintain Buy (1M) with a new TP of Rs395/sh.
 Growth is Back — Topline growth (+23%) was healthy on good traction in most
key markets: India (+22%), US (+26%), LatAm (+23%). The US, in particular,
gained good traction following the “at risk” launch of Tarka (cUS4-5m revenues) &
GLEN expects 6 more launches in 3Q. We expect this faster pace of launches in
the US along with the Indian market to sustain growth momentum going forward.
 Margin Pressure — EBIDTA margin remained under pressure (down 274 bps YoY),
due to a stronger INR & higher R&D spend – a surprise, as we expected these to
be offset by the niche US launches. This may also partly be an offshoot of GLEN’s
efforts to curb debtor days. We expect this trend to persist through FY11 before
the growing traction in higher margin businesses leads to improvement from FY12.

 B/S Improvement Continues — Net debt declined by cRs1.9bn in 1H (net D/E at
0.6x v/s 0.75x), as cash released from working capital was used to repay debt.
Debtor days are down to 119 (155 at FY10 end), while securitized & >6m O/S
receivables also declined 37% & 43% from FY10 levels.
 Earnings & TP Revision — We cut FY11/12 EPS estimates by 13%/4%, entirely on
lower margins. We also introduce FY13 estimates & forecast 28% EPS CAGR over
FY10-13E. Our new TP of Rs395 builds in: a) Rs335/sh for the base biz (roll over
to 16x March’12E), b) Rs26/sh for the GRC-15300 deal with Sanofi (Rs25/sh
earlier), c) Rs16/sh for its P-IV pipeline (new – mainly Zetia) & d) Rs18/sh for its
i nlicensed molecule, Crofelemer (new).