Glenmark Pharma - Steady quarter; Deleveraging to be on focus - ICICI Securities

Glenmark Pharma's (Glenmark) Q4FY21 performance was better than our estimates supported by recovery in US sales and better profitability. Revenue grew 3.3% YoY to Rs28.3bn, EBITDA margin (ex-forex loss) improved 170bps to 18.5% (I-Sec: 17.5%) and adj. PAT increased 37.3% to Rs2.4bn (I-Sec: Rs1.8bn). India business grew 7.7% in line with the industry. US business improved 3.9% QoQ as high price erosion in its derma portfolio has stabilised mid-single digit. The focus of the management is clearly on deleveraging the balance sheet driven by ~Rs4bn FCF in FY22E, IPO of API business and potential capital raise in ICHNOS Sciences (R&D arm) along with out-licensing of two molecules in FY22E which would be positive trigger. Retain ADD.

- India steady, US improves: India business grew 7.7% YoY in line with the industry growth. The company is gaining healthy traction on an innovative anti-diabetic product, Remogliflozin and recently launched line extension (Remogliflozin+Vildagliptin). The company has increased its market share in cardiac and diabetes segments. We expect a CAGR of 11.8% over FY21-FY23E in India business. US revenue increased 3.9% QoQ to US$110mn as price erosion in derma products stabilised. We expect 6.8% CAGR over FY21-FY23E in US revenue to US$474mn driven by new launches. EU and ROW remained flattish largely due to pandemic which affected the growth.

- Margin improving: Gross margin improved 280bps YoY led by higher proportion of India sales. EBITDA margin improved 170bps YoY, though it dropped 240bps QoQ due to higher S,G&A expenses. R&D spend has come down by 170bps in FY21 and is expected to remain at current levels. We believe that the cost saving initiatives are partially sustainable which could keep EBITDA margins stable at ~19% over the medium term. Successful out-licensing of innovative molecules would help in lowering R&D spend further and would provide upside to margins.

- Outlook: We estimate 9.1% revenue and 8.1% PAT CAGRs over FY21-FY23E, respectively, with stable EBITDA margin of ~19%. The company has initiated fund raising exercise as well as partnership for its immunology and pain portfolio for ICHNOS Sciences (innovative R&D arm) in the US to make it a self-sufficient segment and is confident of completing it in FY22. Also successful IPO of API subsidiary would help in deleveraging the balance sheet as the funds would be primarily used for debt reduction.

- Valuations and risks: We remain positive on stock given strong India business and attractive valuation of 14.8xFY23E earnings. We have raise EPS by 9-10% to factor in better margin profile and lower interest cost. Maintain ADD on the stock with a revised target price of Rs655/share based on 16xFY23E earnings (earlier: Rs518/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.594.65 as compared to the previous close of Rs. 592.6. The total number of shares traded during the day was 178986 in over 5798 trades.

The stock hit an intraday high of Rs. 611.6 and intraday low of 591.55. The net turnover during the day was Rs. 107186721.

Source : Equity Bulls

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