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GLENMARK 2QFY11: EBITDA below est; PAT boosted by OI; Slower improvement in working capital; Cutting est; Neutral
- Glenmark’s (GNP IN, Mkt Cap US$2b, CMP Rs324, Neutral) 2QFY11 EBITDA was below expectations. Core revenues grew 18.7% to Rs7b (vs est Rs6.9b) led by 19% growth in branded business and 18% growth in generic formulations business (excluding Tarka upside). Tarka generic contributed ~Rs233m to topline, including which, topline grew 23% to Rs7.24b (vs est Rs7.22b).
- Core EBITDA at Rs1.52b (flat YoY) was lower than our estimate of Rs1.7b mainly due to higher RM costs. Adverse geographical mix was the main reason for higher RM costs. Reported EBITDA at Rs1.7b was up 8.7% mainly led by Tarka contribution (Rs175m to EBITDA). Core EBITDA margin at 21.7% was lower than our estimate of 24.6%. Reported EBITDA margin was at 24.2%.
- Core PAT was up 20.7% to Rs976m (vs est Rs1b). PAT was in-line despite lower EBITDA mainly due to higher OI at Rs353m (vs est Rs157m). OI was boosted by forex gains of Rs120m. Reported PAT at Rs1.1b grew 38% on a low base.
Debtors and inventory position improves; but no major change in overall net working capital; debt continues to be high
- While Glenmark has improved its debtors position to 120 days (as compared to 160 days as of 31-Mar-10) and inventory position to 93 days (105 days as of 31-Mar-10), we note that there has not been any significant improvement in overall net working capital at Rs18.2b as of 30-Sep-10 compared to Rs17.95b as of 31-Mar-10.
- This is mainly because of a corresponding increase in Loans & Advances from Rs5.27b to Rs6b and some reduction in Current Liabilities & Provisions from Rs5.18b to Rs4.92b.
- Glenmark’s net debt at Rs15.68b continues to exert pressure on earnings. While we expect this debt to reduce in the long-term from internal cash generation, we believe that further fund-raising is imperative to bring down debt below the Rs10b mark, which we believe is more manageable.
- While the company is attempting to reduce its working capital requirements, we believe that it may not be easy for the company to reduce it significantly without sacrificing growth, resulting in slower progress on this front.
Trying to build a differentiated portfolio for the US market
- Glenmark currently has over 40 ANDAs pending US FDA approval (with 3 FTFs). One FTF opportunity (Tarka) has been commercialized while 3 products in the Hormones category have also been launched. Glenmark has garnered double-digit market share in these hormones.
- We note that the company has commenced filings for niche opportunities in the Dermatology, Controlled Substances and Hormones categories and has also started receiving some approvals in these categories which is a long-term +ve.
- Management believes that ~75% of the pending ANDAs are in the niche/low-competition category and will thus result in a differentiated portfolio in the long-term.
Undertakes “at-risk” launch of generic Tarka in the US
- Glenmark has undertaken an “at-risk” launch of generic Tarka in the US in Jun-10. The court hearing for Tarka’s patent litigation with Abbott/Sanofi is scheduled for Jan-2011.
- Small size of the product with US$58m of annual revenues will help Glenmark to risk associated with this “at-risk” launch since the potential damages (if Glenmark loses the patent litigation) will not be very high.
- As of now, Glenmark seems to be the only generic company to enter the market and is eligible for 180-day exclusivity on the market.
- Assuming no further competition over the next 12 months and an authorized generic from Sanofi/Abbott, we expect Glenmark to generate one-time PAT of ~US$9m from this opportunity. The upside can reduce if other generic players launch post Glenmark’s 180-day exclusivity.
Cutting estimates 4-6%
We have reduced our earnings estimate for FY11E and FY12E by 6% and 4%, respectively, to take into account:
- The lower than expected operational EBITDA for 2QFY11.
- Slightly higher interest cost.
- Increase in tax rate from 15% to 20% (as guided by management).
- Based on our revised estimates, we expect core EPS of Rs14.5 for FY11E (up 25%) and Rs18.5 for FY12E (up 27%). Including upsides from Tarka, FY11E EPS will be Rs16.
Valuation and view
- We expect Glenmark to record 16.8% topline CAGR for FY10-12 led by 23% CAGR for the generic business, while the branded generic business is expected to grow at a more gradual 14% CAGR.
- Glenmark has differentiated itself among Indian pharmaceutical companies through its significant success in NCE research (resulting in licensing income of US$137m till date). Given this success, Glenmark has been aggressive in adding new NCEs to its pipeline, which will put pressure on its operations in the short-to-medium term as it will have to fund the R&D expenses for these NCEs on its own.
- High net debt of Rs15.68b implies that fund-raising may be needed for de-leveraging the balance sheet (mgmt has indicated that it has no plans for any equity dilution for reducing debt).
- The stock currently trades at 22.3x FY11E and 17.6x FY12E earnings with about 14-16% RoE. Maintain Neutral with TP of Rs295 (16x FY12E EPS).
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