Glenmark Pharma rating: ‘Hold’; Cost control shored up the quarter

By: |
August 24, 2020 1:45 AM

Execution key for recovery; FY21-23e EPS up 11-12% on current outlook; TP raised to Rs 500; ‘Hold’ maintained

GNP will continue to focus on debt reduction (net debt reduction of Rs 1.8 bn in cc during Q1) and optimising R&D costs and capex.

Q1 revenues in most segments were muted due to COVID-19 disruptions and reversal of demand after customers stocked up in the previous quarter. Total revenue of Rs 23.4 bn declined 15.3% q-o-q (+0.9% y-o-y). India sales of Rs 7.8 bn grew 2% q-o-q (+3.7% y-o-y). US sales of $98.5 m declined ~6% both y-o-y and q-o-q in cc terms on continued price erosion in the derma portfolio and decline in mupirocin sales due to high competition.

Gross margin of 65.5% improved 79bp q-o-q and 40bp y-o-y. Ebitda margin of 20.4% improved 356bp q-o-q (+567bp y-o-y), mainly on lower other operating expenses, resulting from savings on marketing & travel costs. Reported PAT of Rs 2.5 bn (+15.3% q-o-q, +132.4% y-o-y) included a one-off benefit of Rs 280 m, consisting of gain from divestment of VWash brand and reimbursements of one-time costs.

Execution remains key for a recovery

While near-term uncertainties continue, GNP expects a gradual recovery in sales growth for key markets like India (driven by continued growth in core therapies of anti-diabetes, cardiac and respiratory) and the US (driven by new launches and scale-up in supplies from the Monroe plant). It expects FabiFlu, which treats mild to moderate COVID-19 cases and was launched in June 2020, to help its India sales in the near term.

GNP will continue to focus on debt reduction (net debt reduction of Rs 1.8 bn in cc during Q1) and optimising R&D costs and capex. Ichnos Sciences (its innovation business) has appointed an investment banker for capital raising in the US, which is planned for H2FY21. A successful capital raising would significantly ease the R&D burden for GNP, which spent $115.7 m for Ichnos or ~8% of revenues in FY20 ($23 m in Q1, ~7.4% of revenues).

Retain Hold; raise TP to Rs 500

GNP’s stock price has risen 46.9% in last three months (including a single-day gain of 26.97% on 22 June 2020 on FabiFlu’s approval in India as an emergency treatment for COVID-19), vs a gain of 26.7% for Sensex. We believe the recent run-up has largely factored in the upside potential from FabiFlu, the expected operational turnaround and debt reduction, where GNP is yet to show consistent results.

GNP is currently trading at a PE of 16x/13.1x based on FY21/22 EPS estimates, versus the three-year average PE of 18x. However, we believe a further re-rating will need to be backed by a notable improvement in execution for consistent earnings growth and debt reduction. Post Q1, we adjust our estimates to be in line with the current outlook, which leads to an 11-12% increase in our FY21-23e EPS estimates. Our revised TP is Rs 500 (from Rs 450). Key catalysts: recovery in US sales, successful capital raising by Ichnos, approval of Ryaltris in the US, positive data readout for ISB 830, and a resolution of FDA issues at the Baddi plant.

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