Glenmark Pharma - Anand Rathi

Strong quarter, but margins disappoint; we maintain a Buy

Glenmark reported better-than-estimated results in 3QFY12, led by strong performances in the specialty and generics businesses and licensing income of US$5m. However, the EBITDA margin in the base business was 18% lower than estimated. We change our estimates to factor in higher revenue from the US and semi-regulated markets, and rising R&D expenditure. We maintain a Buy rating with a revised price target of Rs.376 (earlier Rs.402).

3QFY12 results. Revenue grew 37.3% yoy to Rs.10.3bn vs our expectation of Rs.8.6bn, mainly led by strong growth in the US and semi-regulated markets, and out-licensing income of US$5m. The base business EBITDA margin declined 420bps yoy, to 18%, led by higher raw material costs and R&D spend. Adjusted net profit grew 20.8% yoy, to Rs.1.3bn, vs our expectation of Rs.1.1bn.

Growth across segments. Segment-wise, specialty formulations grew 28.7% yoy, led by semi-regulated markets and Latin America, while domestic formulations grew at a modest 11.3% yoy. The generics segment grew a robust 45.3% yoy, led by strong 56.3% yoy growth in the US and moderate growth in APIs.

Revising estimates. We increase our revenue estimates for FY12-14, by 5-9%, to factor in higher licensing income, strong growth in US formulations and the impact of currency fluctuations. However, we lower our adjusted net profit estimates for FY13-14 by 2-4% due to rising R&D spend that led to a lower EBITDA margin and higher interest cost.

Valuation. We maintain a Buy rating with a revised price target of Rs.376 based on 18x FY13e earnings (from Rs.402 earlier). Of the Rs.26 drop in target price, Rs.21 is due to the ongoing litigation pertaining to Crofelmer. Risks: Regulatory hurdles and currency fluctuations.

Source : Equity Bulls

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