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Glenmark: Higher taxes hit profits
Aug 13, 2015 | Updated on Aug 14, 2015

Glenmark has announced its 1QFY16 results. The company has reported 11.3% YoY growth in sales and 3.3% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 11.3% YoY during the quarter. Barring RoW markets, major geographies witness good growth.
  • Operating margins decline by 1.3% to 21.7% in 1QFY16, largely due to the absence of licensing income for the quarter.
  • Net profit growth is tepid at 3% YoY on account of the decline in operating margins as well as higher tax expenses.

Financial performance summary
(Rs m) 1QFY15 1QFY16 Change
Net sales 14,869 16,552 11.3%
Expenditure 11,445 12,957 13.2%
Operating profit (EBDITA) 3,424 3,595 5.0%
EBDITA margin (%) 23.0% 21.7%  
Other income 35 54 55.2%
Interest (net) 481 419 -12.9%
Depreciation 651 590 -9.3%
Profit before tax 2,326 2,640 13.5%
Exceptional expense - -  
Tax 477 730 53.0%
Minority Interest 1 0  
Profit after tax/(loss) 1,849 1,909 3.3%
Net profit margin (%) 12.4% 11.5%  
No. of shares (m)               282.2
Diluted earnings per share (Rs)     23.7
Price to earnings ratio (x)*     42.8
*based on trailing 12 months earnings

What has driven performance in 1QFY16?
  • Excluding the licensing income in 1QFY15, the net income was up by 13.6% YoY during this quarter.

    Consolidated Business Snapshot
    1QFY15 1QFY16 Change
           
    India 3,972 4,729 19.1%
    US 4,887 5,610 14.8%
    RoW 2,113 1,580 -25.2%
    Europe 977 1,098 12.4%
    Latin America 1,176 2,184 85.6%
    API 1,445 1,350 -6.6%
    Out Licensing Income 299 -  
           
    Total 14,869 16,552 11.3%

  • The domestic formulations grew by around 19% YoY. The company has ramped up share in various therapies like respiratory, cardiac and anti-infectives. On the exports front, the US sales witnessed better growth at 14.8% YoY. Glenmark continues to do well in LatAm. The company has been making profits in this geography since some time now. However, the business environment in Russia continues to be challenging and sales were further impacted here by the impact of currency devaluation. In constant currency terms, the company witnessed much better growth.

  • Although operating margins declined by 1.3% during the quarter, if one excludes the licensing income received in 1QFY15, the operating margins witnessed marginal improvement of 0.4%. Glenmark continues to actively invest in R&D programs. The R&D expenses for the quarter stood at 10.1% of sales vs 9.2% of sales in 1QFY15.

  • The depreciation for the quarter declined due to change in the slab rates. Over and above, the other income includes some forex gains for the quarter. Glenmark witnessed sharp rise in taxes for the quarter and this restricted net profit growth to 3% YoY. The tax rate for the quarter stood at 28%, much above the company's guidance of 20-25%.

  • Glenmark has repaid some part of its debt from the money received from Temasek. By the end of fiscal 2016, Glenmark expects net debt position to be around Rs 2 bn. The net debt in March 2015 stood at Rs 3.1 bn.
What to expect?
At the current price of Rs 1,014, the stock is trading at a price to earnings multiple of 17.7 times our estimated FY18 earnings. Like many pharma companies, Glenmark too had gone through a challenging phase when the company did not receive sizeable approvals form the US. Further, some of its revenues have been impacted by the ongoing turmoil in the emerging markets. However, Glenmark has focused on building a robust pipeline of drugs. Further, the Indian business remains a promising growth driver for the company. Glenmark expects better growth 2QFY16 onwards.

Above all it is important to note that this is the only company which has not faced compliance issues from the USFDA so far. Overall, keeping in mind the valuations, we reiterate our Hold view 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 suggested asset allocation and that no single stock comprises 5% of your portfolio.

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