Glenmark Pharma - Improving margin trajectory - ICICI Securities

Glenmark Pharma's (Glenmark) Q2FY21 performance was above our estimates led by higher India sales and better profitability. Revenue grew 4.9% YoY to Rs29.5bn, EBITDA margin (ex-forex loss) improved 330bps to 19.3%, better than estimated 17.0% and adjusted PAT increased 37.9% to Rs2.7bn (I-Sec: Rs1.9bn). India business grew 17.2% outpacing the industry and our estimates with higher revenue from Fabiflu and 7-8% growth in base business. US business improved 2.9% QoQ as high price erosion in its derma portfolio is stabilising. We believe 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 fall in stock price, we upgrade it to BUY from Add with a revised target price of Rs586/share (earlier: Rs551/share).

- India continues to outperform, US sales stable: India business grew 17.2% YoY vs low single digit industry growth. The 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 supported growth in Q2FY21. We expect a CAGR of 11.0% over FY20-FY23E in India business. US revenue increased 2.9% QoQ to US$101mn as price erosion in derma products stabilised. We expect a moderate 1.7% CAGR over FY20-FY23E in US revenue driven by new launches, which will compensate price erosion. EU grew 10.8% YoY and ROW revenue increased 9.1%.

- Margin on improving trend: EBITDA margin improved 330 YoY to 19.3% driven by controlled costs and improved revenue mix with higher proportion of India sales. Gross margin and R&D expenses were largely flat YoY. Cost saving has largely accrued from S,G&A expenses and the same is partially sustainable. Management also talked about focus on cost control and R&D spend. We expect EBITDA margin to gradually improve 220bps over FY20-FY23E to 18.2%.

- Outlook: The focus on cost-control initiatives and strong India business will benefit over medium to long term. We estimate 7.2% revenue and 17.9% PAT CAGRs over FY20-FY23E, respectively, with margin expansion of 220bps. The company has initiated fund raising exercise for ICHNOS Sciences (innovative R&D arm) in the US to make it a self-sufficient segment and is confident of closing the same by end of CY20. This would also help in bringing down leverage which stood at Rs37.8bn as on Sep'20.

- Valuations and risks: We marginally alter revenue estimates while raise earnings estimates by 6-13% to factor in improving margin profile. We also upgrade the stock to BUY from Add with a revised target price of Rs586/share based on 16xSep'22E earnings (earlier: Rs551/share). Key downside risks: Higher pricing pressure in the US and regulatory hurdles.

Shares of GLENMARK PHARMACEUTICALS LTD. was last trading in BSE at Rs.485.6 as compared to the previous close of Rs. 486.4. The total number of shares traded during the day was 14271 in over 443 trades.

The stock hit an intraday high of Rs. 490 and intraday low of 483.45. The net turnover during the day was Rs. 6946177.

Source : Equity Bulls

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