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Glenmark: Beaten black and blue - Views on News from Equitymaster

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Glenmark: Beaten black and blue

Jun 29, 2009

Performance summary
  • Revenues grow by 7% YoY during FY09 due to delay in product approvals in the US, decline in revenues from the Latin American business and the absence of out-licensing income during the year, which was present in FY08.
  • EBDITA margins tumble by a massive 17.8% due to the substantial increase in costs and a tepid growth in revenues.
  • Bottomline plunges by 69% YoY due to the sharp fall in operating profits, extraordinary expenses incurred during the year and surge in interest costs.

Financial performance: Consolidated snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 5,730 5,158 -10.0% 19,821 21,215 7.0%
Expenditure 3,507 5,343 52.4% 11,765 16,380 39.2%
Operating profit (EBIDTA) 2,223 (186)   8,055 4,835 -40.0%
Operating profit margin (%) 38.8% -3.6%   40.6% 22.8%  
Other income 338 847 150.4% 408 1,455 256.4%
Interest 155 719 364.5% 632 1,405 122.4%
Depreciation 243 296 21.8% 717 1,027 43.3%
Profit before tax 2,164 (354)   7,115 3,858 -45.8%
Exceptional items - (1,170)   - (1,170)  
Tax (35) (316)   794 754 -5.0%
Profit after tax/ (loss) 2,198 (1,207)   6,321 1,935 -69.4%
Net profit margin (%) 38.4% -23.4%   31.9% 9.1%  
No. of shares (m)       248.7 250.5  
Diluted earnings per share (Rs)*         12.4  
P/E ratio (x)         18.5  
* excluding extraordinary items

What has driven performance in FY09?
  • The global economic slowdown and the absence of in-licensing income played a major role in considerably dampening Glenmark’s performance for the full year. The first half of the year saw the company performing very well but things took a turn for the worse during the second half of the year, especially in the last quarter, which was the worst in Glenmark’s history. The topline on a consolidated basis during FY09 registered a tepid 7% YoY growth largely due to delay in product approvals from the US, decline in revenues from its Latin American business, absence of out-licensing income during the year which was present in FY08 and major devaluation in currencies in most operating markets. The latter, especially, led to the destocking of products by the supply chain as the cost of purchase increased subsequently affecting Glenmark’s sales. Having said that, if one excludes the out-licensing income in FY08, overall growth in revenues stood at a decent 21% YoY. For the fourth quarter, however, overall revenues fell by 10% YoY.

  • Revenues from the US markets (which form part of Glenmark Generics Ltd.) grew by 30% YoY during the year but declined by 20% YoY during the fourth quarter. During the year the company received fewer ANDA approvals as compared to last year thereby impacting the pace of sales growth from this region. Having said that, during the fourth quarter, the company filed 6 ANDAs while the number stood at 16 for the full year. Also, the company launched 6 products during the fourth quarter taking the total number of products launched in the US to 45. Currently, Glenmark has over 40 ANDAs in various stages of the approval process with the US FDA.

  • The Latin American business (especially that falling under the speciality segment namely Brazil and Mexico) failed to impress with revenues falling by 36% YoY during the quarter and 17% YoY during the year. These markets continued to be impacted by the overall global economic crisis and significant currency devaluation. Revenues from the Argentina oncology business (part of Glenmark Generics Ltd.) however, reported a robust 30% YoY growth during the year.

    Consolidated business snapshot
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Generics business            
    US 1,963 1,564 -20.3% 5,640 7,338 30.1%
    Latin America (Argentina) 60 76 26.3% 308 400 30.1%
    Europe 9 74 705.3% 9 147 1497.2%
    API 591 505 -14.5% 1,959 1,972 0.7%
    Total generics business (i) 2,623 2,219 -15.4% 7,917 9,857 24.5%
    Speciality business            
    Latin America (Brazil & others) 420 269 -36.0% 1,905 1,580 -17.1%
    Semi reulated markets (SRM) 533 423 -20.6% 2,046 2,355 15.1%
    Europe 83 384 359.6% 369 996 170.2%
    India 1,445 1,617 11.9% 5,132 6,142 19.7%
    Total speciality business (ii) 2,482 2,692 8.5% 9,451 11,073 17.2%
    Out-licensing revenues (iii) 610 -   2,403 -  
    Total (I+ii+iii) 5,714 4,911 -14.1% 19,771 20,930 5.9%

  • As far as the other markets are concerned, sales from the semi-regulated markets grew by 15% YoY during the year driven by the CIS, Africa and Asia-Pacific. Revenues from India grew by a robust 20% YoY during the year and were aided by the dermatology and cardiovascular segments. Revenues from the European region recorded a superlative growth during the year led by the strengthening of its operations in Poland, Romania, Czech Republic and Slovakia.

  • Operating margins, on a consolidated basis, tumbled by a huge 17.8% during FY09 largely due to the substantial rise in costs and tepid growth in sales. As a result, operating profits plunged 40% YoY. All this percolated down to the bottomline which tumbled 69% YoY. Higher interest costs also caused the steep drop in the bottomline as the company had availed of debt at a time when liquidity was scarce and interest rates extremely high. The extraordinary expense that Glenmark incurred during the year was towards one time additional sales allowances given to customers by Glenmark Generics Ltd. Excluding the same, net profits declined by 51% YoY.

What to expect?
At the current price of Rs 230, the stock is trading at a multiple of 9.9 times our estimated FY11 earnings (excluding the out-licensing deals). The global economic crisis and the delay in product approvals have impacted the company’s performance during the year. Higher debt and interest cost have also dampened overall performance. The company is confident of a much better FY10 and expects interest costs to reduce going forward by reducing debt as the liquidity improves. Infact, the company currently has a debt of Rs 19 bn which is likely to reduce by Rs 3-4 bn in FY10 from cash generated by the base business. Further, in the event that the company is successful in bagging an out-licensing deal, revenues from the same will also be utilized towards retiring some debt.

On the R&D front, while the company is in talks with global pharma majors to garner some out-licensing deals, the same could happen at a much slower pace. This is largely due to the global meltdown, which has made innovator companies vary of doling out milestone payments in light of the uncertainty and the necessity to conserve cash. Thus, assuming that Glenmark does not get any more milestone payments, the R&D costs will surge as there will be no partner with whom the costs can either be shared or from whom these costs can be fully reimbursed. This will have an impact on Glenmark’s profitability. The company’s performance has been considerably below our estimates and we shall have to accordingly downgrade our estimates for the full year. We shall soon update our research report on the same.

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Mar 22, 2019 (Close)


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