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Glenmark: Profitability takes a hit - Views on News from Equitymaster
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Glenmark: Profitability takes a hit
Feb 20, 2015

Glenmark has announced its 3QFY15results. The company has reported 6.2% YoY growth in sales and a decline of 46.9% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 6.2% YoY during the quarter. The poor growth was largely attributable to weaker sales in US and RoW markets.
  • Operating margins decline by 7.2% to 15.6% in 3QFY15, this partly attributable to forex losses of Rs 1 bn for the quarter.
  • Poor sales growth and forex losses mar the bottom line too. The net profits are down by 46.9% YoY.

Financial performance: A snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 16,018 17,013 6.2% 43,033 48,690 13.1%
Expenditure 12,368 14,357 16.1% 33,749 39,257 16.3%
Operating profit (EBDITA) 3,650 2,657 -27.2% 9,284 9,433 1.6%
EBDITA margin (%) 22.8% 15.6%   21.6% 19.4%  
Other income 51 21 -58.2% 218 66 -70.0%
Interest (net) 473 513 8.6% 1,422 1,504 5.8%
Depreciation 611 655 7.1% 1,565 1,955 24.9%
Profit before tax 2,617 1,510 -42.3% 6,516 6,039 -7.3%
Exceptional expense -   -    
Tax 474 363 -23.4% 1,494 1,391 -6.9%
Minority Interest (19) (0)   30 0  
Profit after tax/(loss) 2,162 1,148 -46.9% 4,992 4,648 -6.9%
Net profit margin (%) 13.5% 6.7%   11.6% 9.5%  
No. of shares (m)         270.0  
Diluted earnings per share (Rs)         18.7  
Price to earnings ratio (x)*         41.2  
*based on trailing 12 months earnings

What has driven performance in 3QFY15?
  • Topline grew by 6.2% YoY during the quarter. The quarter witnessed healthy growth in India, Europe and LaTam markets. However, US and RoW were a drag on overall performance.

    Consolidated Business Snapshot
      3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
    US 5,214 5,072 -2.7% 15,262 15,034 -1.5%
    Europe 1,358 1,730 27.3% 3,129 4,012 28.2%
    India 3,812 4,331 13.6% 11,275 13,084 16.0%
    RoW 3,015 2,071 -31.3% 6,443 5,924 -8.1%
    Latin America 1,140 2,344 105.6% 2,984 5,829 95.3%
    API 1,479 1,465 -1.0% 3,822 4,506 17.9%
    Out Licensing Income - -   118 299 153.4%
    Total 16,018 17,013 6.2% 43,033 48,688 13.1%

  • The domestic formulations grew by 13.6% YoY. The company has ramped up share in the therapeutic areas of cardiac, respiratory, anti diabetic, and anti- infective. Cardiac and dermatology are ramping up well in the domestic basket.

  • In the exports segment, barring US and RoW markets, majority of the geographies witnessed good growth. The company continued to witness pressure due to lower approvals. The company has 77 pending ANDAs of which 33 are Para IVs. Company expects sales to ramp up once the USFDA starts giving approvals.

  • The issues in Russia impacted the company's performance. It is imperative to note, Russian segment generates superior margins. Hence, the decline in sales and forex losses has dented the company's performance from this region.

  • The operating margins were adversely hit by sharp decline in the revenues from some regions. Other than this, the operating expenses include forex losses of Rs 1 bn. Excluding the forex losses, the operating margins stood at 21.5% for the quarter.

  • Because of the poor topline growth and decline in operating profits, net profits were down by 46.9% YoY.
What to expect?

At the current price of Rs 776, the stock is trading at a price to earnings multiple of 17.2 times our estimated FY17 earnings. The timely US approvals remain the important trigger for the company. Owing to its large pending approvals, the growth in US is expected to be healthy. The Indian business too remains an important growth contributor for Glenmark. Company has been able to ramp up its market share in various therapies. Over and above, company has witnessed progress in some of its R&D programs and expects out-licensing of a couple of its molecules in the next 12-18 months. This will be an important trigger for the company. Having said that, please note our estimates do not factor in any such upside from these molecules, since the risk of failure are much higher in these R&D programs.

In addition to this, the challenges pertaining to geographies like Russia can adversely impact the performance as seen in the recent quarter. Thus, we recommend investors to not buy the stock at these price levels.

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