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Glenmark: Interest costs hurt profits

Jul 27, 2009

Performance summary
  • Revenues grow by 19% YoY during 1QFY10 due to the strong growth reported by the speciality business while the growth of the generics business is flat.
  • EBDITA margins tumble by 7.8% due to the substantial increase in raw material costs and other expenditure (as percentage of sales).
  • Bottomline plunges by 54% YoY due to the fall in operating profits and other income and a surge in interest costs.

Financial performance: Consolidated snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 4,621 5,487 18.7%
Expenditure 3,199 4,223 32.0%
Operating profit (EBIDTA) 1,422 1,264 -11.1%
Operating profit margin (%) 30.8% 23.0%  
Other income 96 25 -73.6%
Interest 155 438 182.5%
Depreciation 215 312 44.7%
Profit before tax 1,148 540 -53.0%
Tax (5) 5  
Profit after tax/ (loss) 1,154 535 -53.7%
Net profit margin (%) 25.0% 9.7%  
No. of shares (m) 250.1 250.6  
Diluted earnings per share (Rs)*   9.9  
P/E ratio (x)   26.6  
* excluding extraordinary items

What has driven performance in 1QFY10?
  • Just like in the last two quarters of FY09, the global economic slowdown had an impact on Glenmark’s performance in 1QFY10. The overall revenues grew by 19% YoY and were largely led by Glenmark’s speciality business which reported a robust 37% YoY growth in revenues. Revenues from the generics business were flat. As far as the speciality business is concerned, growth was driven by the semi-regulated markets, Europe and India. Sales from the semi-regulated markets doubled mainly on account of an improvement in the operating environment in these markets as the distributors started re-ordering after two quarters of de-stocking. Europe recorded an impressive growth on account of the low base effect as this business is in its nascent stages. India did well to report a growth of 19% YoY led by existing products and new product launches.

    Consolidated business snapshot
    (Rs m) 1QFY09 1QFY10 Change
    Generics business
    US 1,909 1,721 -9.9%
    Latin America (Argentina) 71 68 -4.1%
    Europe - 41
    API 401 557 38.8%
    Total generics business (i) 2,381 2,387 0.2%
    Speciality business
    Latin America (Brazil & others) 312 335 7.5%
    Semi reulated markets (SRM) 394 786 99.5%
    Europe 124 269 117.6%
    India 1,397 1,659 18.7%
    Total speciality business (ii) 2,227 3,050 36.9%
    Total (I+ii) 4,608 5,437 18.0%

  • The generics business had a subdued quarter. Revenues from the US declined by 10% YoY on account of a higher base effect as the company had the exclusivity window for a product which was not present this quarter. Having said that, the company has 46 products in the market and 45 ANDAs in various stages of approval with the US FDA. The Latin American business reported a tepid growth of 7% YoY. While Brazil managed to report some growth in sales on account a recovery in the economic environment, in the rest of Latin America sales growth was lower due to delayed approval for new products. The company’s European generics business took off during the quarter to report sales of Rs 41 m. Further, Glenmark is preparing to launch its first few commercial products on its own in the UK in 2QFY10.

  • Operating margins, on a consolidated basis, tumbled by a 7.8% during 1QFY10 largely due to the substantial rise in raw material costs and other expenditure (as percentage of sales). As a result, operating profits fell by 11% YoY. Other expenses were higher largely due to the forex loss of Rs 340 m during the quarter. Thus, on excluding the same, the fall in operating margins was restricted to 1.6%.

  • Glenmark’s bottomline tumbled by 54% YoY on account of the fall in operating profits and higher interest costs (up 183% YoY). The latter was a result of the company availing of debt at a time when liquidity was scarce and interest rates extremely high. Reduction in other income and an increase in depreciation charges also played their part in causing the fall in the bottomline.

What to expect?
At the current price of Rs 255, the stock is trading at 11 times our estimated FY11 earnings. While the last two quarters of FY09 have been poor, the company did manage to grow some parts of its business in 1QFY10. The company is confident of a much better FY10 and while high interest costs persisted during the quarter, it expects them to reduce going forward by retiring debt as the liquidity improves. Infact, the company currently has a debt of Rs 20 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. Besides this, the parent company i.e. Glenmark Pharma Limited has passed an enabling resolution to raise US$ 250 m either through QIBs or FCCBs. These funds are not for operations but to reduce its debt levels.

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. We shall soon update our research report on the company.

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