Mid-teen worries; 'Buy' ratings on Glenmark Pharma shares: Motilal Oswal

Updated: May 19 2014, 12:40pm hrs
Tarka litigation penalty impacts reported PAT: Glenmark Pharmas (GNP) Q4 operational performance was in line with our expectations. Reported sales grew 26% y-o-y to R16.8 bn (our estimate: R16bn) and reported Ebitda grew 34% y-o-y to R3.6 bn (our est. R3.5 bn). However, reported PAT declined 74% y-o-y to R453m (our est. R2 bn) due to exceptional expenditure towards Tarka litigation penalty.

Adjusted for low competition launches and out-licensing income, sales grew 27% y-o-y, Ebitda grew 32% and profit after tax grew 17%. Core Ebitda margin was at 19.7%.

Growth slower in US and India: Growth was stronger than expected in APIsactive pharmaceutical ingredients--(up 63% vs our est. of 37%), Europe (up 30% vs our est. of 8%) and semi-regulated markets (up 55% vs our est. of 14%). Growth for the US and India slowed down during the quarter due to erosion in base business and base effect, respectively.

Guidance for FY15: GNP has guided 16-18% revenue growth for FY15, with Ebitda at R15 bn-15.2 bn. Growth would be strong in emerging markets and Europe (on a low base), and recover to above 18% in India. US business is likely to grow 12-15%, given the lack of clarity on new approvals. R&D expenses would be 9.5-10% and tax rate is likely to be 22%. Capex guidance stands at R4.5 bn-5 bn. The management expects a reduction in net debt.

Raising EPS estimates; maintain Buy: FY15 is shaping up to be a slow year for GNP mainly due to mid-teens growth expectation in the US. Growth drivers in India and key semi-regulated markets remain strong. Higher R&D spends are likely to result in muted margin expansion. We do not expect any major reduction in debt during FY15. However, we expect FY16 to be a stronger year for the US. We maintain Buy with a revised target price of R665.

Takeaways from conference call

Guidance for FY15e: The management has guided for 16-18% revenue growth, with Ebitda expected in the range of R15-15.25 bn. R&D expenses are guided to be in the range of 9.5-10% while tax rate is expected to be 22%.

US business is expected to grow in the range of 12-15% on a constant currency basis. The management expects 3-4/10-12 product launches in Q2/FY15 which will lead to a recovery in growth. Key future launches include gFinacea (FY16) and gZetia (FY17e). GNP is also developing products in niche areas like complex injectables, immuno-suppressants, dermatology and oral contraceptives. These products are expected to drive growth from FY16-17 onwards.

India: The management indicated that the slowdown in growth was due to base effect and expects recovery from Q1FY15 onwards. For the FY15, the division is expected to grow above 18%, given the limited impact by the pricing policy.

Europe: Bulk of the growth in these markets is driven by in-licensed products, which are likely to sustain the growth momentum given the low base. As such, the management is confident for 20-25% growth for FY15e.

Emerging markets: Restructuring in Asian and African operations along with launches in the respiratory areas has led to healthy growth in semi-regulated market (SRMs). The management expects this division to report 18-20% growth in FY15e. Latin America is also expected to grow 20-25%, led by new launches in Venezuela and Argentia, while Brazil is expected to report moderated growth due to stringent regulatory environment. However, LatAm operations are expected to break-even in FY15e.

Gross debt stands at R32.67 bn, net debt at R24.67 bn and net-debt/Ebitda stands at 1.88x. The management expect Ebitda to be between 1.25-1.5x by FY16e.

Working capital days stand at 105 days. The management expects this to be between 105-115 days in FY15e.

Motilal Oswal