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Glenmark Pharma |
On a comeback trail; Upgrade to Accumulate |
ACCUMULATE
CMP: Rs348 Target Price: Rs381
n Adjusted PAT growth of 27% was in-line driven by a) 23% growth in sales at Rs7.4bn (est. of Rs7bn) and b) 11% growth in EBITDA at Rs1.87bn (est. Rs1.77bn)
n Revenue growth was driven by a) 19% growth in Speciality business (55% contribution to top line) and b) 27% growth in Generics business (45% contribution to top line)
n Managements conscious effort to clean the balance sheet is a welcome move; further improvement in working capital situation can lead to expansion in valuation
n Positive Ph-III trials a step forward for Crofelemer launch
n Tweak earning estimates; raise target price to Rs381 (Rs308 earlier); upgrade to Accumulate from Hold
Recurring revenue growth of 23% above our estimates
Glenmark reported recurring revenue growth of 23% to Rs7.2bn, which is above our
expectations of 16% growth. Higher than expected growth in revenues was on account
of a) 19% growth in the Specialty business, driven by robust growth across key markets
and b) 27% growth in Generics business, driven by higher traction in US. Growth in US
was on account of new product launches. Tarka (which was launched at-risk in Jun’10;
court hearing scheduled in Jan’11) clocked revenues of US$4-5mn, in-line with
expectations. 22% growth in India (estd. 18%), 23% growth in Lat Am (estd. 15%) and
10% growth in SRM (in-line) were the key growth drivers for the specialty business. In
the API segment, growth was led by launch of Adapalene in US and higher traction from
the regulated markets. Overall, the management has guided for 25% revenue growth for
FY11E (including licensing income) on the back of a) 25% growth in US market (guided
for US$200mn vs. est. of US$190mn), b) 18-19% growth in domestic formulation
business, c) 15% growth in SRM market and d) 30% growth in the Lat Am business.
EBITDA grew by 11%; recurring APAT by 27%
Despite 23% growth in top line, EBITDA margins for the quarter contracted by 254bps due
to a) 201bps decline in gross margins, led by 31% increase in raw material cost, b) 26%
increase in employee cost, c) 23% increase in other expenditures, and d) higher R&D
spend of Rs350mn. Appreciation in INR against the USD and geography mix (higher
contribution of Lat Am and lower contribution of SRM) also impacted margins. Going
forward, management expects OPM to expand to 25-26% on the back of contribution from
high margin SRM, India and niche products in the US markets. In FY12E, management has
guided R&D expenditures of US$40-45mn ($25-30mn NCE; $15mn for generics), which will
restrict the margin expansion beyond 267%.
APAT (net of Rs120mn forex gain) grew 27% on account of a) lower interest cost (down
32% YoY), and b) lower depreciation (down 5% YoY). Higher tax provision (20.3% of PBT
vs. est. of 16%) restricted further PAT growth. Glenmark’s conscious efforts to improve the
working capital have resulted in receivable days to come down from 155 days (FY10) to
119 days (based on annualized sales of Q2FY11) during the quarter. The net debt as on
30th Sept was Rs15.7bn. EPS for Q2FY11 and H1FY11 stood at Rs3.7 and Rs9.2 against
our full year expectation of Rs17.5. We expect APAT to grow at FY10-12 CAGR of 33% to
Rs5.3bn, clocking EPS of Rs19.6.
Balance sheet purification – a welcome move
In our report dated 27th Sept, 2010, we have highlighted key balance sheet concerns that
were continuing to act as an overhang on the stock performance. As a conscious attempt to
address these issues, the management has been successful in reducing the debtor days
from 155 day as on FY10 end to 119 days as on end of Q2FY11 with sharp improvement in
outstanding receivables > 6 months falling to Rs2bn from Rs3.6bn in FY10. Moreover,
securitized receivables were reduced from Rs3.91bn on FY10 end to Rs2.45bn as on
Q2FY11. Although the improved working capital has not had any meaningful impact on the
debt position on a QoQ basis, we believe continued focus on cash flow generation would
result in better earnings quality and ease concerns on balance sheet quality.
49% of gross block into intangibles; will take one time hit of Rs4-5bn:
The gross block has a built up of huge intangibles to the tune of Rs10.6bn (49% of gross
block), which may lead to significant increase in amortization charges in the future. Even
out of Rs6bn, which is currently in CWIP, more that Rs1bn is intangibles. We are of the
view that company has to take one time hit of Rs4-5bn in intangibles once it will adopt
IFRS. This, we believe, is keeping the street away from significant revision in earnings
upgrade.
Tweak earning estimates by 3% each for FY11/12E; raise target price to
Rs381
Glenmark’s Q2FY11 numbers are above expectations. Going forward, management has
guided for a) 18-20% growth in the domestic business, b) 10% growth in the SRM and c)
30% growth in LatAM markets. Moreover, new limited competition launches in the US such
as the Malorene, Cutivate, Oxycodone, Calpotriene and Tarka will continue to drive the US
growth. Management has guided for US$200mn in revenues from the US in FY11E against
our expectation of US$190mn. Higher ANDA launches (10-12 per annum) will likely help the
company to clock-in revenues of US$240mn in FY12E. In the OC segment, the company
has filed 13 ANDAs (3 products have already been launched). We believe, for Glenmark,
the changing profile in the US generic space is interesting, while consistent growth in the
domestic formulation business provides comfort. Other smaller, but critical, specialty
markets of LatAm, the EU and RoW are witnessing gradual traction in revenues.
Moreover with positive Ph-III trials on Crofelemer, the probability of commercial launch of this
molecule has increased significantly. Glenmark has in-licensed this molecule from Napo
pharma with exclusive marketing rights in more than 140 emerging markets (peak revenue
potential of US$80mn) as well as sole global API suppliers. We expect Glenmark to launch
this molecule end CY12E and ascribe a NPV of Rs14/share (50% probability).
Going forward, because of low base effect and higher revenue visibility from US on account
of new launches such as Tarka and other products in oral contraceptive and derma range,
we expect core business revenue and earnings CAGR of 18% and 33% respectively over
FY10-12E. We slightly tweak our earnings estimates upwards to Rs17.5 and Rs19.6 in
FY11E/FY12E on account of lower interest cost and improvement in working capital
management. On the back of improved revenue visibility, we revise our target price on the
stock to Rs381 (Base business at Rs333, Rs48 as an NPV of Sanofi deal, Crofelemer and
Zetia opportunity). Any positive development on NCE pipeline may act as positive catalyst
for the stock.
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