Glenmark Pharma - Lower costs aid margin - ICICI Securities

Glenmark Pharma's (Glenmark) Q1FY21 performance was above our estimates on profitability front driven by cost control and improved revenue mix with higher India sales. Revenues grew 0.9% YoY to Rs23.4bn, EBITDA margin improved 460bps to 20.4%, better than estimated 15.3% and adjusted PAT increased 62.8% to Rs2.1bn (I-Sec: Rs1.2bn). India business grew 3.7% outpacing the industry and our estimates with strong traction in new products especially Remogliflozin and strong chronic portfolio. US business declined with high price erosion in its derma portfolio. We believe the margin expansion was the key highlight of the quarter driven by cost savings and we expect these savings to be partially sustainable. Considering the recent rally in stock price, we downgrade it to ADD from Buy with revised target price of Rs538/share.

- India continues to outperform, US remains weak: India business grew 3.7% YoY vs decline in industry growth. Company is gaining healthy traction on an innovative anti-diabetic product, Remogliflozin etabonate. Glenmark also launched Fabiflu during Jun'20 for the treatment of mild to moderate COVID-19 and this should support growth Q2FY21 onwards. We expect a CAGR of 10.3% over FY20-FY22E in India business. US revenues declined 6.3% QoQ to US$99mn due to continued erosion in key derma products and no major launches. We expect a moderate 1.0% CAGR over FY20-FY22E in US revenues driven by new launches which would compensate for price erosion. EU grew 12.8% YoY while ROW and Latam declined 18.1 and 18.9% respectively.

- Margins improve: EBITDA margin improved 460/360bps YoY/QoQ to 20.4% driven by controlling costs during lockdown and improved revenue mix with higher proportion of India sales that also helped in gross margin expansion. R&D expenses were also down ~190bps YoY and QoQ. We believe some part of cost control initiatives on staff and S,G&A expenses which was started two quarters back, would be sustainable. We expect EBITDA margin to gradually improve to 190bps over FY20-FY22E to 17.9%.

- Outlook: The focus on cost control initiatives and strong India business would benefit over medium to long term. We estimate 7.4%/18.9% revenue/PAT CAGRs over FY20-FY22E with margin expansion of 190bps. The company had recently initiated fund raising exercise for ICHNOS Sciences (innovative R&D arm) in US to make it a self-sufficient segment.

- Valuations and risks: We raise earnings estimates by 3-6% to factor in improving margin profile and also raise target P/E to 16x from 15x to factor in improving business mix with higher proportion of India sales. However, considering recent rally in stock, we downgrade it to ADD from Buy with a revised target of Rs538/share based on 16xFY22E earnings (earlier: Rs490/share). Key downside risks are: higher pricing pressure in the US, and regulatory hurdles.

Shares of GLENMARK PHARMACEUTICALS LTD. was last trading in BSE at Rs.480.9 as compared to the previous close of Rs. 475.4. The total number of shares traded during the day was 794740 in over 18957 trades.

The stock hit an intraday high of Rs. 508.5 and intraday low of 476.5. The net turnover during the day was Rs. 387942838.

Source : Equity Bulls

Keywords