Glenmark Pharmaceuticals - Annual Report Analysis - Edelweiss

Glenmark Pharmaceuticals (Glenmark) FY12 annual report analysis highlights healthy cash flows supported by improved cash conversion cycle and translation loss adjustment. Adjusted for one-offs, EBITDA margin improved 400bps due to lower other expenses despite increase in raw material cost as a percentage of sales. Lower amortisation on IFRS transition and lower effective tax rate maintained PAT margin.

Healthy cash flows with improved fixed assets t/o ratio augur well

Glenmark continued to generate healthy free cash flow of INR3.6bn in FY12 (FY11: INR3.8bn) supported by lower w/cap requirement and translation loss adjustment (net) of INR0.7bn. Fixed asset turnover ratio rose from 1.5x in FY11 to 1.8x in FY12.

Cash conversion cycle improved albeit w/c components appear high

Cash conversion cycle has improved significantly from 225 days in FY11 to 128 days in FY12. However, inventory days and creditor days remained high at 216 and 196, respectively, in FY12 (FY11: 279 and 191).

INR depreciation may lead to further MTM forex loss

During FY12, management clarified that the company had MTM forex loss of INR1.5bn through P&L. With the INR depreciating ~10% in Q1FY13 and repayment of INR2.4bn debt in FY13, Glenmark is likely to have higher realised forex loss.

Negative movement in translation reserve in addition to forex loss

In addition to forex loss charged to P&L, Glenmark has also recognised translation loss of INR1.7bn in FY12 (gross of translation gain of INR1.0bn on fixed assets) through reserves on translation of foreign subsidiaries. With INR depreciating versus foreign currency and significant loan book in Indian entities, positive networth subsidiaries should post translation gains. Management has attributed the translation loss to intra-group loans (between subsidiaries) and other liabilities.

Tax expense remains low at 5%

Deferred tax asset (DTA) on carry forward business loss in subsidiaries has jumped from INR1.4bn in FY11 to INR2.4bn in FY12. Effective tax rate remains low at 4.9% in FY12 (FY11: 4.9%).

Adjusted EBITDA margins rise on the back of lower other expense

Glenmark's reported EBITDA margins dipped from 20.1% in FY11 to 17.8% in FY12. However, adjusting the EBITDA margins for one-timers, EBITDA margins have jumped from ~20% to ~24% primarily due to lower other expenses. This is despite increase in raw material consumed as a percentage of sales from 34.7% to 35.7%.

Source : Equity Bulls

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