Glenmark’s Q3 numbers disappointed on US sales growth front and lower margins. US generic sales grew by mere 8.2% YoY and de-grew 8.8 % QoQ on back of product withdrawal during the quarter and slow pick-up in recently launched products. We expect the company’s US sales to pick-up from Q4 onwards on back of gradual improvement in market share.

Post the negative news flow on Tarka, the stock is trading at 21.2x FY11 and 15.8x FY12 recurring earnings. We recommend Buy on the stock with a target price of Rs332 (ex-Tarka).

US sales growth disappoints

Glenmark reported Net Sales of Rs7,508mn, up 21.4% YoY, driven by speciality formulation segment (India, Latin America, and RoW). The prime disappointment was the meager 8.2% YoY growth on US generic business in spite of 6 product launches during the quarter.

Higher employee and other expenses dent margins

The company reported improvement in gross margins by 37bps QoQ to 66.9% in spite of low contribution from US generic business. However the expansion on the gross margin was impeded by higher salary and other expenses.

Key call takeaways

1) Lower growth in US on back of withdrawal of Nitroglycerin in Q3 and slower market penetration in new product launches, company expects US business to grow by 25% YoY in FY12. 2) Expects strong growth in speciality formulation segments – India, Latin America and RoW. 3) Gross Debt at Rs17,800mn while no improvement in Net working capital days QoQ.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 21.2x FY11E and 15.8x FY12E earnings. We recommend BUY on the stock with a target price of Rs332 valuing the base business at Rs310 (18x FY2012E earnings), Rs11 FTF (primarily Zetia and Malarone) and Rs11 for NCE (Crofelemer). We have not factored in Tarka in our estimates on back of uncertainty over outcome of litigation.