Glenmark Pharma -Strong business momentum; Buy :: BoA ML

Visit http://indiaer.blogspot.com/ for complete details �� ��


Glenmark Pharma
Strong business momentum;
Focus on cash flows - Buy

􀂄 2Q beats expectations; Reiterate Buy with PO of Rs390
Glenmark’s 2Q PAT at Rs1.12bn (up 38% YoY) was 14% above BofA-MLe, led by
stronger revenues at Rs7.2bn (up 23% YoY, 8% above est). EBITDA margins
remained firm at 25.2% (in line), sharp reduction in debtor days (119 days, down
by 36 days) & lower leverage (65% now vs 80% in Mar-10) reflected improved
earnings quality. We raise EPS estimates and our PO to Rs390/sh, as we believe
the stock should re-rate to 18x FY12E EPS, in line with pharma sector average
noting strong earnings momentum (29% EPS CAGR), improving B/S & upside
from NCE pipeline.

Expect strong momentum across businesses to sustain
Generics business registered 27% growth led by strong US generics (up 26%) &
30% growth in API sales. Specialty business (up 19%) was led by India
formulations outpacing industry growth at 22% (Rs22.4bn), followed by recovery
in SRM markets (Rs883mn, up 20% QoQ). Sustenance of recovery in base
business across segments was encouraging, given rupee appreciation diluting the
impact. We remain upbeat on strong 2H on the back of 5-8 new launches in US,
while branded markets (India, Russia, Africa, etc) would maintain momentum.

Balance sheet health improves; Focus on cash flows
Glenmark’s focus on improving Balance Sheet (B/S) yielded positive results with
(1) Gross debt reduced to Rs17bn (from Rs18.7bn in Mar-10), implying D/E of
0.66x (vs 0.8x in Mar-10); (2) Significant reduction in debtor days to 119 days (for
1H) compared to 155 days (for Mar-10); (3) Securitized receivables down from
Rs3.9bn to Rs2.4bn now. We believe continued focus on cash flow generation
would result in better earnings quality and allay concerns on B/S health.

Attractive valuations; Outlicensing – key upside risk
Trading at 14x FY12E earnings (adj NCE val. Rs30), Glenmark is trading at 20%+
discount to peers despite stronger earnings profile (CAGR of 30% vs 25% for
peers). Any positive development on NCE pipeline may provide upside surprise.