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Spark Capital: Glenmark Pharmaceuticals - 2Q FY14 result review - Mixed quarter; maintain ‘Add’




Spark Capital Advisors(India) Private Limited


05 Nov 2013





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Mixed quarter; maintain ‘Add’ Glenmark reported a healthy topline growth (17% yoy) and EBITDA margin improvement (120bps yoy) in Q2FY14. However, higher tax and depreciation led to a 2% yoy decline in PAT. Strong growth in India (21% yoy, in spite of price control-related issues) and US (15% yoy constant currency) were positives, while disappointing growth and guidance for RoW (-10% yoy) and LatAm (3% yoy) were negative takeaways. Ex-NCE value, the stock trades at 20x and 16x our FY14 and FY15 earnings estimates. We await further improvement in cash flow profile and balance sheet and value the stock at Rs. 575 per share (17x FY15E EPS of Rs. 32.7 plus Rs. 20 per share for the two NCEs out-licensed to Sanofi Aventis). Maintain ‘Add’ rating on the stock Takeaways from post-results conference call: Domestic formulations growth for the quarter was 19%. US sales for the quarter grew 15% (in constant currency) benefiting from price increases in certain products. During the quarter Glenmark filed 6 ANDAs with the USFDA and received 4 ANDA approvals. Glenmark currently has 53 ANDAs pending with the USFDA RoW sales declined 10% yoy. Management expects a better H2 and guided for ~12% growth for the segment in FY14. LatAm growth for the quarter (3% yoy) was muted due to underperformance of subsidiaries in Brazil and Mexico Depreciation and amortization increased sharply to Rs. 605mn (vs. Rs. 300-350mn in the last several quarters). The increase was attributed to capitalization of tangible assets (Rs. 4.2bn of tangible CWIP as of Mar 2013) and amortization of intangible assets (product licenses). Quarterly D&A will remain at these levels. We note that intangible assets (including goodwill) of Rs. 12.7bn account for ~20% of the company’s total assets (~46% of net worth) Glenmark received licensing income of Rs. 118mn during the quarter from Forest Labs as part of the mPEGS-1 inhibitors development partnership Company maintained its sales (20% yoy growth) and EBITDA (Rs. 12.3bn) guidance for FY14 Net debt increased to Rs. 25.8bn (from Rs. 21.4bn in Mar 2013). The increase was largely due to rupee depreciation. Working capital cycle is at 119 days (112 days in Sep 2012, 106 days in Mar 2013). R&D expense for the quarter was Rs. 1.4bn (9.% of sales). Tax rate for FY14 was guided at 22-23%

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