Glenmark Pharmaceuticals Ltd - Weak Q1 on tepid growth in US/RoW; Maintain BUY, TP Rs353 - PINC Result Review

Weak Q1 on tepid growth in US/RoW

Glenmark reported a weak 9% YoY increase in sales and a 10% decline in recurring EBITDA on the back of a tepid 6% growth in US (13% in US$ terms) and a 7% decline in RoW markets. EBITDA margins (excluding forex) declined ~500bps to 24.4% on higher staff cost and other expenditure. We continue to be positive on the US business recovery driven by launches in the niche generics category. Maintain Buy.

Sales in US and RoW lag estimates; India/EU in line

Tepid growth of 6% in US (13% in US$ terms) in Q1 is an aberration, in our view and we continue to forecast a 20% growth for FY11e. A 7% decline (flat in local currency) in RoW markets is surprising. The management has re-iterated its 25-30% growth for FY11e for the RoW markets. Strong momentum continued in India and EU.

Margins decline on higher costs & tepid US growth

Despite a muted 9% sales growth, expenditure has increased 19% leading to a sharp decline in margins.

Marginal improvement in Debt levels

Glenmark indicated that the receivables have come down from 137 days as at end of Q4FY10 to 131 days as at end of Q1FY11. Inventory has also gone up from 90 days to 100 days due to build up of the Tarka launch. Net debt at Rs1.6bn is down from Rs1.8bn at end of Q4FY10.

VALUATIONS AND RECOMMENDATION

Given the near term uncertainty over the NCE R&D pipeline and milestones thereon a cost basis method is more appropriate way to value the NCE R&D effort. We value the base business at 18x Sept'11 earnings after adding back NCE R&D (net of tax shield). We also add Rs15/share as NPV for the 'at risk' launch of Tarka in US. Accordingly our target price stands at Rs353. Maintain 'BUY'.

Source : Equity Bulls

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