Glenmark Pharmaceuticals - Consensus surprise - Elara Capital

Currency tailwinds; India fillip aids growth

Glenmark's sales growth of 18% in the quarter was a positive surprise for the street. We observe that the INR depreciation against the USD in Q2FY13 pushed growth in exports by 33% YoY. Currency tailwinds also contributed heavily in non-US exports such as Brazil, Mexico, Nigeria, Russia, South Africa, and Argentina. While Glenmark's average US sales increased to above USD75mn/quarter, we believe that the company's 20% YoY US growth (9% QoQ growth) in Q2FY13 was also benefitted from channel-filling of Malarone generics before Prasco's (AG) entry. India formulations continued showing good growth, clocking 35% YoY growth in Q2FY13. With strong growth in consecutive three quarters (while domestic growth slows down to 12%-15%), we expect inventory stockpile before new NPPA could impact sales of the company in H2FY13E.

Higher realization lifts margins

With net forex realization benefits of 0.5%-1%, Glenmark reported EBITDA margin of 22%, implying 300bps decline YoY. We note that its core operating margin maintains at 19%-20% in Q2FY13, which was within the management guidance. It incurred INR1050mn R&D cost, in-line with management guidance of 7%-8% of sales. The company maintains 14%-16% tax rate in H2FY13E on the back of MAT benefits from Sikkim plant. Expected tax rate for FY13E is guided at 17%-18%.

Valuation: Upgrade to Accumulate, increase target price to INR506

With 75% share of OC and derma products in pending ANDAs, Glenmark is comfortably ahead of our estimation in H1FY13, though management maintains 20% YoY growth guidance for FY13. While new competition in Malarone could impact US growth and crowding OC segment may reduce prospect, we notice improvement underlying growth in core business in key geographies. There is, however, a possibility of reversal in forex benefits and lower growth in US and India on a higher H1FY13 base. Nevertheless, we upgrade our recommendation to Accumulate and increase target price to INR506.

Source : Equity Bulls

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