Glenmark Pharma :Strong quarter, but margins disappoint; we maintain a Buy:: Anand Rathi

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Glenmark reported better-than-estimated results in 3QFY12, led by
strong performances in the specialty and generics businesses and
licensing income of US$5m. However, the EBITDA margin in the base
business was 18% lower than estimated. We change our estimates to
factor in higher revenue from the US and semi-regulated markets, and
rising R&D expenditure. We maintain a Buy rating with a revised price
target of `376 (earlier `402).
 3QFY12 results. Revenue grew 37.3% yoy to `10.3bn vs our expectation
of `8.6bn, mainly led by strong growth in the US and semi-regulated
markets, and out-licensing income of US$5m. The base business
EBITDA margin declined 420bps yoy, to 18%, led by higher raw material
costs and R&D spend. Adjusted net profit grew 20.8% yoy, to `1.3bn, vs
our expectation of `1.1bn.
 Growth across segments. Segment-wise, specialty formulations grew
28.7% yoy, led by semi-regulated markets and Latin America, while
domestic formulations grew at a modest 11.3% yoy. The generics
segment grew a robust 45.3% yoy, led by strong 56.3% yoy growth in the
US and moderate growth in APIs.
 Revising estimates. We increase our revenue estimates for FY12-14, by
5-9%, to factor in higher licensing income, strong growth in US
formulations and the impact of currency fluctuations. However, we lower
our adjusted net profit estimates for FY13-14 by 2-4% due to rising R&D
spend that led to a lower EBITDA margin and higher interest cost.
 Valuation. We maintain a Buy rating with a revised price target of `376
based on 18x FY13e earnings (from `402 earlier). Of the `26 drop in
target price, `21 is due to the ongoing litigation pertaining to Crofelmer.
Risks: Regulatory hurdles and currency fluctuations.