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Glenmark Pharma
IFRS cleanup affects 4Q;
Maintain Buy
„Operational results better than IFRS numbers
Glenmark’s 4Q sales grew 11% YoY to Rs7.9bn, in line with BofAMLe while
reported EBITDA & profits were much below due to IFRS conversion related oneoffs (Rs650mn) affecting comparison. One time staff expenses, other write-offs
led to weak FY11 EBITDA margins of 19.6% (vs 26% BofAMLe), however
compensated by lower depreciation & tax rates (deferred credits). As a result,
FY11 EPS was mere 6% below estimates. We cut our FY12/13 EPS estimates by
18-20% to factor (a) lower EBITDA margins (b) lower depreciation & higher tax
rates. We cut our PO by 10% to Rs350 on rollover to 16x FY13E EPS (vs 18x).
In line 4Q sales growth led by US, India
Specialty business (up 6%) growth appeared subdued due to weaker India
formulations (up 7%), affected by high base as well as net of VAT reporting under
IFRS. Strong chronic therapy led domestic franchise, recovery in RoW/LatAm
markets would sustain 20%+ growth in this segment. Generics biz grew strongly
by 37% led by US generics (up 21%) run-rate picking up on new launches of
approved ANDAs, supported by surge in API supplies (up 69%). We expect
Glenmark to sustain 20% sales CAGR over FY11-13E (vs 25% mgmt guidance).
Margins to improve gradually
We forecast cumulative 110bps EBITDA margin expansion over FY11-13E to
result in 22% EBITDA growth, surpassing revenues, led by impact of niche
launches in US (Malarone, Cutivate) as well as scaling up of domestic franchise.
Our EBITDA margin forecast of 20.9%/21.3% for FY12/13E factors conservative
IFRS assumptions, compared to management target of 22% EBITDA margin.
IFRS conversion addresses Balance Sheet concerns
IFRS measures improved transparency as a result of (a) recognizing off-balance
sheet debt (factored receivables) worth Rs1.5bn in books, (b) Intangibles write-off
of Rs4.5bn (charged from reserves) addressing R&D cost accounting concerns.
Conservative IFRS reporting to reflect fair valuation of intangibles, working capital
Price objective basis & risk
Glenmark Pharm (XVQWF)
Our PO of Rs350 is based on SoTP comprising Rs320 for the base business and
Rs30 for NCE research valuation. Our Rs320 valuation of Glenmark's base
business is based on 16x FY13E core EPS, in line with its mid-cap peers. We
believe Glenmark's re-rating is justified, noting strong rebound in base business
momentum.
Our base case research valuation of Rs30 is based on NPV of GRC 15300
(outlicensed to Sanofi) and Melogliptin (diabetes) but not including valuation for 4
other molecules in clinical trials stage with uncertainty on outlicensing
opportunities in the medium term. This suggests an overall fair value of Rs350/sh.
Downside risks: a) Delay in progress/failure of research molecules, leading to
delay in milestone receipts (b) Execution risks in the base business (c) Litigation
and regulatory risks for the generics entity (e) High debtor position implying high
working capital position.
Upside risks: a) Better than expected base business pickup, b) Better than
expected outcome of Phase II results on key molecules, c) earlier than expected
receipt of milestone income from existing partne
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Glenmark Pharma
IFRS cleanup affects 4Q;
Maintain Buy
„Operational results better than IFRS numbers
Glenmark’s 4Q sales grew 11% YoY to Rs7.9bn, in line with BofAMLe while
reported EBITDA & profits were much below due to IFRS conversion related oneoffs (Rs650mn) affecting comparison. One time staff expenses, other write-offs
led to weak FY11 EBITDA margins of 19.6% (vs 26% BofAMLe), however
compensated by lower depreciation & tax rates (deferred credits). As a result,
FY11 EPS was mere 6% below estimates. We cut our FY12/13 EPS estimates by
18-20% to factor (a) lower EBITDA margins (b) lower depreciation & higher tax
rates. We cut our PO by 10% to Rs350 on rollover to 16x FY13E EPS (vs 18x).
In line 4Q sales growth led by US, India
Specialty business (up 6%) growth appeared subdued due to weaker India
formulations (up 7%), affected by high base as well as net of VAT reporting under
IFRS. Strong chronic therapy led domestic franchise, recovery in RoW/LatAm
markets would sustain 20%+ growth in this segment. Generics biz grew strongly
by 37% led by US generics (up 21%) run-rate picking up on new launches of
approved ANDAs, supported by surge in API supplies (up 69%). We expect
Glenmark to sustain 20% sales CAGR over FY11-13E (vs 25% mgmt guidance).
Margins to improve gradually
We forecast cumulative 110bps EBITDA margin expansion over FY11-13E to
result in 22% EBITDA growth, surpassing revenues, led by impact of niche
launches in US (Malarone, Cutivate) as well as scaling up of domestic franchise.
Our EBITDA margin forecast of 20.9%/21.3% for FY12/13E factors conservative
IFRS assumptions, compared to management target of 22% EBITDA margin.
IFRS conversion addresses Balance Sheet concerns
IFRS measures improved transparency as a result of (a) recognizing off-balance
sheet debt (factored receivables) worth Rs1.5bn in books, (b) Intangibles write-off
of Rs4.5bn (charged from reserves) addressing R&D cost accounting concerns.
Conservative IFRS reporting to reflect fair valuation of intangibles, working capital
Price objective basis & risk
Glenmark Pharm (XVQWF)
Our PO of Rs350 is based on SoTP comprising Rs320 for the base business and
Rs30 for NCE research valuation. Our Rs320 valuation of Glenmark's base
business is based on 16x FY13E core EPS, in line with its mid-cap peers. We
believe Glenmark's re-rating is justified, noting strong rebound in base business
momentum.
Our base case research valuation of Rs30 is based on NPV of GRC 15300
(outlicensed to Sanofi) and Melogliptin (diabetes) but not including valuation for 4
other molecules in clinical trials stage with uncertainty on outlicensing
opportunities in the medium term. This suggests an overall fair value of Rs350/sh.
Downside risks: a) Delay in progress/failure of research molecules, leading to
delay in milestone receipts (b) Execution risks in the base business (c) Litigation
and regulatory risks for the generics entity (e) High debtor position implying high
working capital position.
Upside risks: a) Better than expected base business pickup, b) Better than
expected outcome of Phase II results on key molecules, c) earlier than expected
receipt of milestone income from existing partne
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