Glenmark Pharmaceuticals - Q3FY14 Update, CMP Rs.554, Maintain Hold, Target Rs.580 - Sushil Finance

GLENMARK PHARMACEUTICALS LTD - Q3FY14 RESULT UPDATE - CMP Rs.554, Maintain Hold, Target Rs.580

Glenmark Pharmaceuticals Ltd. (Glenmark) has reported Q3FY14 results ahead of expectations on the operating front led by margin expansion, but higher depreciation and tax rate hurt net profit. The company's top line increased by 15.9% YoY whereas PAT came in flat on a YoY basis to Rs. 2124 mn. However, PAT adjusted for licensing income of Rs. 493 mn in Q3FY13 grew by 27%. The following are the key highlights of the results which are summarized below:

Key Highlights of Q3FY14

- Revenue & EBIDTA up by 15.9% & 14.0% whereas PAT came in flat. EBIDTA Margins came in at 22.8% vs 23.2% (excluding licensing income of Rs. 493 mn in Q3FY13) in Q3FY13 & EPS came in at Rs. 7.8. Management is confident of exceeding its EBITDA guidance of Rs. 12250 mn in FY14E. FY14E EPS at Rs. 24.7 with 9MFY14 EPS at Rs. 18.3. The company targets margin expansion of 100 bps on a yearly basis going forward.

- Specialty business grew 17.4% led by Europe 45% (combination of new launches with higher effectiveness in sales and marketing activities coupled with disciplined P&L and cash management), India 19% (led by respiratory, anti-infective, gynecology, derma & anti diabetes) & LataM 18% (driven by Mexico, Venezuela. G-Seretide launch expected in Q4FY14 in Mexico). ROW markets grew 15%. FY14E growth to be ~15%+ led by strong Russian/CIS winter season & operational efficiency to kick in Brazil & emerging markets. LataM market to be driven by Mexico & Venezuela with Brazil dependent on approvals for growth.

- Generics grew 26.9% led by Europe 72% led by enhanced presence through distribution partners in European countries. Europe now EBIDTA positive. US grew 19% (CC 11%) with the company focusing on improving margins which also led to the company walking away from Montelukast business. Only 7 Approvals received by the company in 9MFY14. GPL is all geared to ramp up its filings in niche areas with increased approvals & launches per year to drive growth.

- Tax rate guidance increased to 22-23% for FY14E with it expected to come down next year led by shifting of some operations to Indore SEZ. Net Debt at Rs. 25630 mn from Rs. 25800 mn in Q2FY14 led by currency revaluation. CC net debt flat YoY.

- Q3FY14 R&D cost at 8.5% sales with 9MFY14 at 9.2% of sales led by ramp up in filings like Derma, OC etc.

- Crofelemer to take time to see a ramp up. Expected launch from Glenmark in H2FY15 in some markets. GPL supplied close to Rs. 60 mn of API to Salix for its launch in US.

OUTLOOK & VALUATION

Glenmark registered strong revenue growth for the quarter with strong performance in markets such as India, LataM & Europe whereas the only disappointment was low growth in the US market on account of withdrawal Montelukast tablets from the market (lower margins) and lack of new approvals. Growth in the Russian market was also marginally affected due to the mild winter in Q3FY14. However going forward, we expect the growth momentum to continue, driven by consistent growth in its domestic business, faster approvals & new launches in the US market & continuing recovery in Latam and other semi-regulated markets. We have upward revised our EBITDA margin & debt estimates for FY14E & FY15E however our EPS estimate for FY15E remains unchanged. We continue to recommend Hold on the stock with a TP of Rs. 580 (18x FY15E EPS of Rs. 32.2). More out-licensing deals, milestone payments and the successful launch of Crofelemer would act as an upside risk to our estimates.

Source : Equity Bulls

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