Glenmark Pharmaceuticals Ltd. - GEPL CAPITAL

Q3FY12 – Impressive topline growth but forex losses put margins under pressure. Pain to stay for some time.

Glenmark Pharmaceuticals Ltd. (Glenmark) reported an impressive 36% Y-o-Y growth in topline at Rs.10,313 mn in Q3FY12 against Rs.7,585 mn in Q3FY11. This was led by robust growth in Europe (48%), Latin America (48%) and Rest of the World (48%).

EBITDA showed a 41% Y-o-Y decline to Rs.1,029 mn in Q3FY12 against Rs.1,741 mn in Q3FY11. EBITDA margin declined drastically from 23% in Q3FY11 to 10% in Q3FY12 due to 49% Y-o-Y rise in raw material cost, 45% Y-o-Y rise in staff cost and 78% Y-o-Y rise in other expenses. Other expenses include MTM loss of Rs.1,020 mn.

Net profit declined 58% Y-o-Y to Rs.461 mn against Rs.1,096 mn in Q3FY11. This was due to MTM losses of Rs.1,020 mn on dollar denominated loans. Adjusting for the MTM losses, net profit was 35% higher at Rs.1,481 mn.

Result Highlights
Impressive sales growth across all geographies

Glenmark reported strong sales growth in almost all its geographies. The growth was quite profound compared to the same in Q3FY11; Africa, Asia and CIS (48% in Q3FY12 vs 27% in Q3FY11), Europe (48% vs 27%), Africa and Middle East (36% vs 36%). Glenmark's market share in Dermatology increased from 8.3% to 8.4%, in Cardiac from 2.4% to 2.5%, and in Respiratory from 1.2% to 2.7%.

MTM loss spoils the picture

Glenmark reported MTM loss of Rs.1,020 mn for Q3FY12 due to dollar denominated loans. Excluding the MTM loss, EBITDA was 18% higher at Rs.2,049 mn with an EBITDA margin of 20% for Q3FY12 against reported margin of 10%. Net profit was 35% higher at Rs.1,482 mn in Q2FY12 with a net profit margin of 14.4% against reported margin of 4.5%.

Short term pain to remain due to changing revenue mix

Glenmark reported lower margins despite high topline growth due to several factors like inventory rationalization in India (because of which its India growth reduced from 30% in Q3FY11 to 11% in Q3FY12), increasing contribution to sales from Latin America, Central Eastern Europe and US generics (which are inherently low margin businesses), higher R&D spend and higher staff cost. Management expects situation to normalize in a couple of quarters.

Valuation & viewpoint

At the CMP of Rs.312, Glenmark is trading at 14x its FY13E consensus earnings estimate. The stock is at a discount compared to its peers. However, this discount is expected to stay for at least a couple of quarters after which the company is expected to see a boost in margins. Hence the stock should be approached with caution for the immediate term.

Source : Equity Bulls

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