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Glenmark: US reports meek performance
Aug 1, 2013

Glenmark has announced its first quarter result for the financial year 2013-2014 (1QFY14). The company has a reported 19% YoY growth in sales and a 64.3% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 19% YoY during the quarter led by growth in both its specialty and generics businesses.
  • Operating margins surge by 4.1% leading to a 50.1% YoY growth in operating profits.
  • Bottomline growth jumps by 64.3% YoY during 1QFY14 with the net margins also improving by 2.9%.

Financial performance: A snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 10,407 12,382 19.0%
Expenditure 8,756 9,904 13.1%
Operating profit (EBDITA) 1,651 2,478 50.1%
EBDITA margin (%) 15.9% 20.0%  
Other income 26 33 27.2%
Interest (net) 380 465 22.1%
Depreciation 275 349 26.9%
Profit before tax 1,022 1,698 66.1%
Exceptional expense - -  
Tax 218 392 80.0%
Minority Interest 21 19  
Profit after tax/(loss) 783 1,286 64.3%
Net profit margin (%) 7.5% 10.4% 2.9%
No. of shares (m)     270.0
Diluted earnings per share (Rs)     24.6
Price to earnings ratio (x)*     23.3
*based on trailing 12 months earnings

What has driven performance in 1QFY14?
  • Topline grew by 19% YoY during the quarter led by growth in both its specialty and generics businesses.

    Consolidated Business Snapshot
    (Rs m) 1QFY13 1QFY14 Change
    Generics Business
    US 3,924 4,470 13.9%
    Europe 332 465 40.0%
    Latin America 39 37 -6.2%
    API 1,005 1,271 26.5%
    Total Generics (i) 5,300 6,243 17.8%
    Specialty Business
    India 2,798 3,286 17.4%
    RoW 1,348 1,686 25.0%
    Latin America 631 841 33.5%
    Europe 270 261 -3.1%
    Total Specialty Business (ii) 5,046 6,074 20.4%
    Out Licensing Income (iii) - -  
    Others (iv) 58 62 7.7%
    Total (i)+(ii)+(iii)+(iv) 10,404 12,379 19.0%

  • In the generics business, the US business recorded a growth of 13.9% YoY, and in constant currency terms growth was at 11.8%. During the first quarter, the company was granted 4 ANDA approvals. With this, the company's cumulative approved drugs stand at 87. The company has 53 products awaiting approval of which 26 are Para IVs. EU generics witnessed robust growth of 40% YoY on the back of new launches. The constant currency growth was still healthy at 35% for this segment. Latin America witnessed decline in sales by 6.7%. This segment largely comprises of oncology drugs.

  • In the Specialty segment, India grew by 17.4% YoY for 1QFY14 vs. industry growth of 10%. Company's IMS ORG ranking has improved from 22nd in June 2012 to 19th during June 2013. Company continues to remain confident on the company's domestic growth. As per the management the pricing policy will impact the sales by Rs 60 m. Unlike various other companies, Glenmark's sales were not impacted by the strike by Maharashtra stockists. The RoW markets grew by 25% YoY on back of good performance in its various geographies.

  • On the R&D front, the company incurred R&D expenses of Rs 1,120 m. Company has guided for a run rate of 8%-9% of sales for the upcoming period. Large part of this will be spent on the generic R&D especially for the US market.

  • Operating margins surged by 4.1% leading to a 50.1% YoY growth in operating profits. The improvement in the operating margins was also helped by rupee depreciation.

  • Bottomline growth jumped 64.3% YoY during 1QFY14 with the net margins also improving by 2.9%. The tax for the quarter was at 23%, for full year company has guided for the tax rate to hover around 17-18%.

  • Over and above, the company did not comment on the type of US approvals going forward. This raises concerns about the growth from this segment. Though the company has made most of its filings in the niche area, we believe the US should ramp up in the upcoming quarters. Company maintained its FY14 guidance at 20% growth for the year, as it expects operating leverage in the upcoming quarters. However, one should note that the US is an important segment and growth in this geography is important for the company's overall performance.

Financial highlights and other updates
  • Net debt stands at Rs 24 bn. The increase is because of the depreciating rupee.
  • Capex: For the 1STquarter, the capex incurred was at Rs 820 m. For full year, the company has guided for Rs 3.4 bn
  • Working capital cycle stands at 115 days against 106 days in March 2013 quarter.
  • Forex gain for the quarter was Rs 250 m which is included in the other income.
  • Mupirocin calcium cream 2%: GSK has launched authorized generics for this.
  • Sitagliptin litigation in India Outcome is expected in some time.

What to expect?
At the current price of Rs 560, the stock is trading at a price to earnings multiple of 13 times our estimated FY16 earnings. Going forward, the key growth drivers for the company will be the US, Latin America and ROW markets. In US especially, its focus on a niche product portfolio will augur well for the company. The Indian business is expected to show good performance on the back of increased market share. The company is expecting trial data for its R&D pipeline in next 12-18 months and is also looking out for licensing partners for its pipeline. Overall, we maintain our Hold rating on the stock.

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