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Glenmark: US, India see sluggish growth
May 10, 2014

Glenmark has announced its 4QFY14 results. The company has reported 25.9% YoY growth in net sales and a decline of 74.9% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by 25.9% YoY during the quarter led by growth in its export formulations and API segment. However, Indian and US formulations witness muted growth.
  • Operating margins improve by 290 bps (2.9%), leading to the 46.8% YoY growth in the operating profits. This was partly attributable to licensing income of Rs 247 m realized during the quarter, which was not there in 4QFY13.
  • Bottomline declines by 74.9% YoY during 4QFY14 on back of one time losses due to Tarka patent litigation. However, company's profit before tax grows by a healthy 46.3% YoY.

Financial performance: A snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 13,355 16,817 25.9% 50,123 59,838 19.4%
Operating income 4 219   14 231  
Expenditure 10,758 13,219 22.9% 39,971 46,968 17.5%
Operating profit (EBDITA) 2,600 3,817 46.8% 10,167 13,101 28.9%
EBDITA margin (%) 19.5% 22.4%   20.3% 21.8%  
Other income (50) (121) 144.0% 94 97 4.1%
Interest (net) 436 464 6.5% 1,600 1,885 17.8%
Depreciation 318 603 89.6% 1,270 2,168 70.7%
Profit before tax 1,797 2,629 46.3% 7,390 9,145 23.7%
Exceptional expense - 2,175   - 2,175  
Minortiy Interest 30 3 -88.9% 83 33 -59.7%
Tax 46 19 -59.0% 1,107 1,513 36.6%
Profit after tax/(loss) 1,721 431 -74.9% 6,200 5,423 -12.5%
Net profit margin (%) 12.9% 2.6%   12.4% 9.1%  
No. of shares (m)         271.0  
Diluted earnings per share (Rs)         20.0  
Price to earnings ratio (x)*         27.2  
(* on trailing twelve months earnings)

What has driven performance in 4QFY14?
  • Topline (including other operating income) grew by 27.5% YoY for the quarter. For the full year FY15, the topline growth stood at 19.8% YoY.

    Consolidated business snapshot
      4QFY13 4QFY14 Change FY13 FY14 Change
    US 4,291 5,009 16.7% 16,887 20,270 20.0%
    Europe 1,492 1,932 29.5% 3,724 5,060 35.9%
    India 3,550 3,830 7.9% 13,096 15,105 15.3%
    RoW 2,294 3,425 49.3% 8,493 9,869 16.2%
    Latin America 792 1,062 34.1% 3,468 4,045 16.6%
    API 939 1,531 63.1% 3,976 5,353 34.6%
    Out Licensing Income - 247 0.0% 493 365 -26.0%
    Total 13,358 17,035 27.5% 50,137 60,067 19.8%

  • The Indian formulations business witnessed lower growth of 7.9% YoY during 4QFY14. Poor performance was due to lower growth in its generic-generic portfolio and OTC drugs. The growth was also impacted due to issues in the trade channels. However, these issues are now sorted out and company has guided for better growth in FY15. Company expects improvement in MR productivity on the back of product launches.

  • Barring US formulations, other export segments witnessed good growth. The US formulations segment witnessed poor performance with growth of 16.7% YoY for the quarter. In constant currency terms, this growth was lower at 2.6% YoY. This was due to delay in new approvals and lack of new launches during the quarter. However, the company expects the approvals and launches to come on track from 2QFY15. Company has guided for 10-12 launches in FY15. Glenmark currently has 65 applications pending in various stages of the approval process with the US FDA, of which 32 are Paragraph IV applications. The other geographies witnessed strong growth on back of increase in market share and new launches. Company has also launched Seretide generics (respiratory drug) in various emerging market during the quarter. While all the other geographies witnessed robust growth, Brazil continued to face some pressures and thus reported moderate growth of 10% YoY for the quarter.

  • The API segment witnessed robust growth of 63.1% YoY, driven by additional supply of Crofelemer API and a low base effect.

  • The R&D expenses for the quarter stood at 9% of the sales. Going forward too, the company has expects R&D expenses to be in the range of 9.5-10%.

  • Operating margins improved by 2.9% to 22.4%, leading to the 46.8% YoY growth in operating profits. This was partly attributable to licensing income of Rs 247 m realized during the quarter, which was not there in 4QFY13. Excluding operating income and licensing income, the company's EBITDA margins stood at 20.2%, up by just 0.7%.

  • Bottomline declined by 74.9% YoY during 4QFY14 on back of one time write offs of Rs 2.2 bn due to Tarka patent litigation. However, the company's profit before tax reported a healthy growth of 46.3% YoY.
What to expect?
At the current price of Rs 580, the stock is trading at a price to earnings multiple of 13.5 times our estimated FY16 earnings. Going forward, the key growth drivers for the company will be the US, Latin America and ROW markets. While the US and India geographies witnessed muted growth for the quarter, these are still expected to be the key growth drivers for the company going forward. The higher debt remains a concern for the company. While Glenmark continues to remain positive on its various R&D programs, we remain conservative and have thus not assigned any value to its molecules. Based on the current valuations, we reiterate Hold rating on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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