Accumulate Glenmark Pharma- Results lag estimates; Emkay

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Glenmark Pharma

Results lag estimates; Maintain Accumulate

ACCUMULATE

CMP: Rs 301                                       Target Price: Rs 371

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n     Q3FY11 results were below estimates with a) Revenues at Rs7.6bn (est. Rs7.7bn) b) EBITDA at Rs1.7bn (est. Rs1.9bn) and c) APAT at Rs950mn (est. Rs1.1bn )

n     Revenue growth was driven by a) 25% growth in Speciality business (60% contribution to top-line ) and b) subdued 7% growth in Generics business (40% contribution to top-line)

n     Lower US sales were due to slower ramp-up in recently launched products and adverse impact of forex movement

n     Tweak earning est. downwards by 5%/3% for FY11/FY12E; However valuations reasonable at 16xFY12 EPS as stock corrected sharply over the last one month

Recurring revenue growth of 22% below estimates

Glenmark reported recurring revenue growth of 22% to Rs7.6bn, which is below our

expectations of 25% growth. Growth in revenues was on account of a) 25% growth in

the Specialty business (est. 21% growth), driven by robust growth across key markets

and b) subdued 7% growth in Generics business (est. 26% growth), on account of lower

traction in US. Lower growth in US was on account of delay in ramp-up of recently

launched products and unfavorable forex movement. However, Oxycodone (MS 75%),

Adapalene (MS 45-50%) and Ciproflax (MS 30%) were the key revenue grossers for the

company. 30% growth in India (est. 19%), 88% growth in Lat Am (in-line) and 27%

growth in SRM (est. 10%) were the key growth drivers for the specialty business.

Robust growth in the domestic formulation business (above market growth rate of

~17%) was driven by 6 new product launches across therapeutic segments (total 14

new launches in 9MFY11) and higher productivity from the 2300 sales reps. Overall, the

management has guided for 25% revenue growth for FY12E on the back of a) 25%

growth in US market, b) 20-25% growth in domestic formulation business, c) 15%

growth in SRM market and d) 30-40% growth in the Lat Am business.

Cost pressure dents profitability Despite 22% growth in top line, EBITDA margin contraction was due to a) 154bps decline in gross margins, led by 23% increase in raw material cost, b) 30% increase in employee cost, c) 26% increase in other expenditures, and d) higher R&D spend of Rs350mn during the quarter. R&D expenditure for 9MFY11 stood at Rs950m translating to 4.5% of consolidated sales. Management has guided for R&D expenditure of Rs1bn in FY11/ FY12 each. Appreciation in INR against the USD and geography mix (higher contribution of Lat Am and lower contribution of SRM) also impacted margins. Going forward, we have toned our EBITDA margin expectations to 26.4% in FY11E (from 27.4%) and to 26.1% in FY12E (from 26.3%). Higher than expected R&D expense will further restrict the margin expansion beyond 26%. APAT (net of Rs180mn forex gain) de-grew 9% on account of poor operating performance coupled with higher tax provisioning (19.4% of PBT vs. est. of 16% of PBT and 5% of PBT in Q3FY10). Lower interest and depreciation charge restricted further margin erosion. The net debt as on 31st Dec was Rs17.8bn. AEPS for Q3FY11 and YTDFY11 stood at Rs3.5 and Rs12.7 against our full year expectation of Rs16.6 (revised). Expect APAT to grow at FY10-12E CAGR of 31% to Rs5.1bn, clocking EPS of Rs19. Tweak earning estimates by 5% and 3% for FY11/12E; sharp correction in stock price leaves room for valuations to expand Glenmark’s Q3FY11 numbers were below expectations with US business lagging our expectations. We revise our earnings estimates downwards by 5% and 3% to Rs16.6 and Rs19.0 in FY11E/FY12E as we anticipate increasing cost pressure to restrict margin expansion. We also remove Tarka revenues from our FY12 estimates, given the unfavorable court verdict against the company. We revise our target price on the stock downwards to Rs371 (Base business at Rs323, Rs48 as an NPV of Sanofi deal, Crofelemer and Zetia opportunity). Any positive development on NCE pipeline may act as a catalyst for the stock. Gradual improvement in the base business performance and positive developments on the out-licensing front, has led to 20% rise in stock price over the past one year. However, recent litigation on Tarka has led to 17% erosion in stock price over the last one month leaving room for higher upside from CMP. Maintain Accumulate. Overall, we continue to remain positive on Glenmark given its future R&D pipeline consisting of niche products like dermatology, hormones and Para-IVs.