Glenmark Pharma Intraday Buy Call
Strong growth in all the markets, dip in margins Glenmark’s Q2FY11 results were better than our expectation. Strong 23% sales growth was based on the growth in US (+26%), Europe (+33%) and India (+22%). Lower realisation couple with the change in the product & customer mix dragged the gross margins by 200bps. EBITDA grew by slower rate of 11%. However, lower interest and depreciation translated in 15% growth in PAT.
We continue to be positive on the US business recovery driven by launches in the niche generics category. We raise our TP to Rs369 from Rs353 as we roll forward to Dec’11 earnings. We maintain BUY recommendation.
US, Europe and India retains strong growth Continuous product launches in the developed market and aggressive marketing efforts in domestic formulation have resulted in 23% sales growth. US exhibited strong growth after 5-6 quarters while we continue to believe 20% growth in FY11e and FY12e. Strong momentum continued in India and EU.
EBITDA margins decline, to be ~25-26% in FY11e & FY12e EBITDA margins declined by 271bps YoY while improved 140bps QoQ (excluding one time milestone income). We expect margins to be in the range of 25-26% for FY11e and FY12e.
Reduction in Debt helped the interest cost Glenmark receivables have come down to 119days from 155days in Q4FY10. It has also reduced the net debt level to Rs15.6bn from Rs17.6bn at the end of FY10. It has reduced the interest burden to ~Rs300mn in Q2FY11 compared to ~Rs450mn in Q2FY10.
VALUATIONS AND RECOMMENDATION We are more sanguine about Glenmark's return to high growth in the US (more niche product launches vs. an existing plain vanilla generic product portfolio) and RoW markets (volume growth). Given near-term uncertainty over the NCE R&D pipeline and related milestones, we believe cost basis is more appropriate for valuing the NCE R&D effort. We value the base business at 18x Dec'11E earnings after adding back NCE R&D (net of tax shield). We also add Rs15/share as NPV for 'at risk' launch of Tarka in the US. This yields a TP of Rs369. We maintain 'BUY'.