Neutral on Glenmark Pharmaceuticals - Motilal Oswal

GNP's 3QFY12 operational performance was in-line with estimates. Excluding generic Malarone exclusivity upside in US, revenues were higher than estimates with 33.4% growth to INR10b vs est of INR9.12b, EBITDA was up 10.5% to INR1.84b (vs est of INR1.85b) and EBITDA Margins declined 380bps to 18.4% vs est of 20.3%.

Topline growth was mainly led by INR238m of NCE licensing income and higher than expected growth in the branded business. US generic revenues increased 56% YoY.

Excluding NCE research income of INR238m, core EBITDA margins were at 16.4% vs est of 18.2%. EBITDA margins were lower than estimates due to significant increase in costs. However GNP has been able to compensate lower margins by better topline.

Adjusted PAT at INR83m (excl both NCE research & Malarone upsides) was higher than our est of a net loss of INR314m mainly due to lower than expected forex losses. The company reported MTM forex loss of INR1.02b vs our estimates of INR1.39b.

Outlook and View: GNP has differentiated itself among Indian pharmaceutical companies through its significant success in NCE research. Given this success, Glenmark has been aggressive in adding new NCEs to its pipeline, which will raise R&D costs in the short-to-medium term. Also, likely absence of strong forex gains (INR1.3b for FY11 vs INR1.75b forex loss in 9MFY12) will temper down the earnings growth for FY12. High debt and low return ratios remain our main concerns despite the strong growth traction. Based on our revised estimates, we expect EPS of INR10 for FY12 and INR20.6 for FY13. The stock currently trades at 29.5x FY12E and 14.4x FY13E earnings. Maintain Neutral with TP of INR323 (15x FY13E EPS + INR14 DCF value of Crofelemer & Para-IV pipeline).

Source : Equity Bulls

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