Glenmark Pharma: Momentum is building, re‐rating may set in :: Avendus

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Glenmark Pharmaceuticals
Target Price (INR) 387 Momentum is building, re‐rating may set in

GNP’s 2QFY11 top line exceeded our expectations, led by strong
performance across key geographies. Even after adjusting for Tarka,
revenue growth of 19% is encouraging. On the base earnings, we now
see momentum build up and believe the company is striding the path
of recovery. However, we remain a little concerned about the balance
sheet, as net leverage does not seem to be receding. We largely
maintain our estimates and forecast a three‐year CAGR of 26% in PAT.
As visibility (and confidence) returns, a P/E expansion is likely to
follow. We rollover our target price to Dec11 and raise it to INR387.
We maintain our Add rating.
Top line beats expectations…
GNP’s 2QFY11 net revenues of INR7.2bn exceeded our expectations, led by
strong performance across key geographies. After adjusting for generic Tarka,
US revenues grew by c13% y‐o‐y. API sales (up 30%) and EU generic revenues
(up 61%) supported growth in the generic segment. In the specialty segment,
domestic formulation sales of INR2.2bn were up 22% y‐o‐y, while semiregulated
markets, the EU and LatAm grew by 10%, 24% and 23%, respectively.
Excluding Tarka, we estimate base revenue growth at 19%.
…B/S concerns persist, but operating margins disappoint slightly
Despite strong top line growth, operating margins, at 25.2%, were slightly
disappointing. Adjusting for Tarka, we estimate core margins to have settled
close to 24%. Receivable days (adjusting for licensing fee) were at 132 at end
Sep10 (down from 159 at end Mar10), while inventory days improved from 330
in Mar10 to 318. However, the improved working capital has not had any
material impact on the net debt position, which was virtually unchanged q‐o‐q.
During FY10‐FY13, we forecast a fall in gross leverage, which is a critical
assumption underlying earnings growth.
Key takeaways from the analyst call
1) R&D spend in 2QFY11 stood at cINR350mn (INR600mn in 1HFY11); FY11f
R&D guidance at INR1.5bn; 2) Tarka sales in 2QFY11 at cUSD5mn; court hearing
scheduled in Jan11; 3) 1HFY11 capex at INR1.5bn; FY11f target at cINR2.5bn.
Momentum returning; raise target price to INR387 and maintain Add
GNP is showing momentum in its core business and we believe the company is
striding the path of recovery. While concerns on the balance sheet persist, we
believe the company is likely to improve its cashflow cycle—the improving
receivable/inventory days being lead indicators. The changing profile in the US
generic space is interesting, while consistent growth in domestic formulations
provides comfort. Other smaller, but critical, specialty markets of LatAm, the
EU and RoW are stumbling back on track. As visibility (and confidence) returns,
P/E expansion is likely to follow. We largely maintain our estimates and
forecast a three‐year CAGR of 17% in revenues and 26% in PAT, which is likely
to lead to a 360‐bp expansion in ROCE. We rollover our base earnings to Dec11.
The SOTP target stands at INR387 and we maintain our Add rating on the stock.