Glenmark Pharmaceuticals: Lower margin leads to PBT miss, sales growth impressive :: Kotak Sec

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Glenmark Pharmaceuticals (GNP)
Pharmaceuticals
Lower margin leads to PBT miss, sales growth impressive. While sales were 11%
higher than our estimate, lower EBITDA margin at 20.5% led to PBT adjusted for forex
loss, research income at Rs1.3 bn, up 6% qoq, 10% below our estimates. We reduce
our FY2012E PAT by 6% due to lower margin in 2HFY12E, leave FY2013E largely
unchanged. We estimate EPS (excluding research income, forex) to grow at 17% in
FY2013E to Rs22.6. Maintain ADD with PT at Rs395—15X FY2013E core EPS, at 25%
discount to front-line generics multiple due to balance sheet concerns—debt/equity at
1X, impacted by higher Rupee rate and gross block up by Rs1.5 bn in 1HFY12 with
capex at Rs1 bn, according to the company implying addition to intangibles/CWIP.
Sales at Rs9.4 bn were up 29% yoy, 11% higher than our estimate
Sales growth was impressive, up 29% yoy, as seen in 1QFY12. The beat mainly came due to
higher (1) US sales at US$65 mn, up US$10 mn qoq led by (a) market share gains in OCs and
others, (b) launch of 3 products this quarter and (c) Malarone launch, and (2) ROW sales which
grew at an impressive 73% yoy.
EBITDA margin (adjusted for forex) drops qoq to 20.5%
EBITDA margin adjusted for net forex loss of Rs850 mn (Rs1.3 bn was MTM translational loss on
forex debt of US$350 mn and Rs430 mn was forex gain on net receivables) was at 20.5%, down
400 bps qoq, 80 bps lower than our estimate mainly due to sharp jump in R&D expenses. This led
to PBT adjusted for forex loss and research income at Rs1.3 bn, 10% below our estimates. We
expect EBITDA margin to remain at 20.5% in 2HFY12E, same as that seen this quarter due to (1)
pick-up in R&D expenses, (2) higher staff costs on account of sales force hiring in India.
We maintain ADD with PT at Rs395 (unchanged), 15X FY2013E EPS
We expect Glenmark to report sales CAGR of 20% over FY2012-14E (29% in1HFY12) and expect
softer EBITDA margin in 2HFY12E leading to EBITDA margin adjusted for forex at 21% in FY2012-
13E (22.5% in 1HFY12). We estimate EPS before exceptional (excluding licensing income of
US$55 mn in FY2012E and forex loss of 2QFY12) to grow at 17% in FY2013E to Rs22.6 on the
back of (1) base business growth, (2) FTF contribution (see Exhibit 6) of Cutivate (EPS of Rs1.3) in
FY2013E. We arrive at PT of Rs395 on account of (see Exhibit 4) (1) 15X FY2013E core EPS of Rs26
(adjusting for FTF, research income and adding back NCE spend) at 25% discount to front-line
generics due to (a) net intangibles constituting 47% of fixed assets as of FY2011, (b) write-offs of
Rs4.8 bn in CWIP (was 25% of fixed assets), (c) addition of Rs2 bn to product intangibles in
FY2011, (2) Zetia value per share of Rs8.