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MOSL: GLENMARK (Buy) - Core EBITDA in line despite slower sales growth - High deprn. and taxes dent PAT




Motilal Oswal Securities Ltd.


05 Nov 2013





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Glenmark Pharmaceuticals (GNP IN, Mkt Cap USD2.4b, CMP INR562, Buy) Alok Dalal (Alok.Dalal@MotilalOswal.com) / Hardick Bora (Hardick.Bora@MotilalOswal.com) Operational performance in-line: Glenmark (GNP) posted in-line operational performance for 2QFY14. Core sales (excluding licensing income) grew 19% YoY to INR14.5b (v/s our estimate of INR15.2b). Core EBITDA grew 28% YoY to INR3b (in line) and core PAT grew 1% YoY to INR1.4b (v/s our estimate of INR1.8b). Licensing income was INR118m (we had not anticipated any licensing income for the quarter). Sales growth in LatAm, semi-regulated markets slower than expected: Sales growth was driven by stronger than expected growth in domestic formulations (up 21% YoY) and US generics business (30% YoY, partly currency-led). In LatAm (down 3% YoY) and semi-regulated markets (down 11% YoY), sales growth was slower than expected. Adjusted PAT significantly below estimate: Core EBITDA margin expanded 150bp YoY to 20.9% (v/s 19.7%), driven by better sales mix, with increasing contribution from recently launched products in the US. Adjusted PAT was significantly below estimate despite strong EBITDA margin, due to higher depreciation and taxes (effective tax rate at 28.5% v/s our estimate of 18%). Guidance: While GNP has maintained its 20% sales growth guidance for FY14, to be driven by the US and India, it expects to exceed its earlier EBITDA guidance of INR12.25b. On the negative side, GNP has raised its tax rate guidance to 22-23% from 19%, and has indicated higher depreciation, going forward. Cutting estimates; maintain Buy: Post 2QFY14 results, we have cut our FY14/FY15 EPS estimates by 7%/4%, mainly due to higher depreciation and tax expense, despite estimating higher EBITDA growth. We expect GNP to gradually reduce its net debt over FY14-15, resulting in D/E improving from 1x in FY13 to 0.6x by FY15. GNP has differentiated itself among Indian pharmaceutical companies through its significant success in NCE research (resulting in licensing income of USD205m till date). Given this success, GNP has been aggressive in adding new NCEs to its pipeline, which will put pressure on its operations in short-to-medium term, as it will have to fund R&D expenses for these NCEs. The stock trades at 23x FY14E and 17.7x FY15E EPS. Maintain Buy with a revised target price of INR610.

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