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Glenmark: Profits take a hit
Oct 29, 2009

Performance summary
  • Revenues grow by 7% YoY during 2QFY10 led by India and the semi-regulated markets.
  • EBDITA margins reduce by 2.2% due to an increase in raw material costs and other expenditure (as percentage of sales).
  • Bottomline plunges by 41% YoY due to the substantial reduction in other income and higher interest costs and depreciation charges.


Financial performance: Consolidated snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 5,609 6,025 7.4% 10,230 11,512 12.5%
Expenditure 3,915 4,340 10.9% 7,114 8,564 20.4%
Operating profit (EBIDTA) 1,694 1,685 -0.6% 3,117 2,949 -5.4%
Operating profit margin (%) 30.2% 28.0%   30.5% 25.6%  
Other income 433 141 -67.5% 529 166 -68.6%
Interest 187 456 143.8% 342 895 161.4%
Depreciation 225 362 60.9% 441 674 53.0%
Profit before tax 1,715 1,007 -41.3% 2,863 1,546 -46.0%
Tax 541 198   536 203 -62.1%
Profit after tax/ (loss) 1,174 809 -31.1% 2,327 1,343 -42.3%
Net profit margin (%) 20.9% 13.4%   22.7% 11.7%  
No. of shares (m)       250.1 269.6  
Diluted earnings per share (Rs)*         7.9  
P/E ratio (x)         27.7  
* excluding extraordinary items

What has driven performance in 2QFY10?
  • Glenmark’s overall revenues grew by 7% YoY during the quarter. The company’s speciality business grew by a mere 7% YoY. As far as the speciality business is concerned, in Latin America, due to the change in the business model in Brazil, revenues from the Latin American markets (excluding Argentina) declined by 29% YoY. While Europe also did poorly, the only saving grace was the decent performance put up by the Indian and semi regulated markets which grew by 18% YoY and 14% YoY respectively. The de-growth in Europe was mainly on account of lower sales in Poland caused by delayed product launches due to intellectual property related hurdles.

    Consolidated business snapshot
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Generics business            
    US 1,761 1,771 0.6% 3,670 3,492 -4.9%
    Latin America(Argentina) 143 119 -17.1% 214 187 -12.7%
    Europe 32 94 197.0% 32 135 327.9%
    API 539 592 9.8% 940 1,149 22.2%
    Total generics business (i) 2,475 2,576 4.1% 4,856 4,963 2.2%
    Speciality business            
    Latin America (Brazil & others) 562 399 -29.0% 874 735 -16.0%
    Semi reulated markets (SRM) 705 802 13.8% 1,099 1,588 44.6%
    Europe 296 283 -4.3% 420 553 31.7%
    India 1,559 1,843 18.2% 2,957 3,502 18.4%
    Total speciality business (ii) 3,122 3,327 6.6% 5,349 6,377 19.2%
    Total (I+ii) 5,597 5,903 5.5% 10,205 11,340 11.1%

  • Revenues from the generics business also failed to impress growing by a tepid 4% YoY during the quarter. Revenue growth in the US was flat as delay in product approvals from the US FDA continued to hamper this business. Having said that, the company has 49 products in the market and 45 ANDAs in various stages of approval with the US FDA. Further, out of the total 6 potential FTF Para IV applications filed by the company, Glenmark is the sole first filer on 4 products. The oncology business in Argentina declined by 17% YoY. While Europe saw revenues tripling due to a lower base, revenues from the API business came in at 10% YoY.

  • Operating margins fell by 2.2% during 2QFY10 largely due to an increase in raw material costs and other expenditure (as percentage of sales). As a result, operating profits fell by 1% YoY. For the half year period, operating margins fell by nearly 5% resulting in the operating profits dipping by 5% YoY.

  • Glenmark’s bottomline tumbled by 31% YoY and the fall was sharper than the 1% YoY drop in operating profits due to reduction in other income and higher interest costs (up 144% YoY). The latter was a result of the company availing of debt at a time when liquidity was scarce and interest rates extremely high.

What to expect?
At the current price of Rs 218, the stock is trading at 9 times our estimated FY12 earnings. While the first half of 1HFY10 has not seen the company do too well, the scenario is expected to improve in the second half of the year as the businesses begin to pick up. The company’s interest costs are high currently due to debt of Rs 19 bn on its books. This is likely to reduce by Rs 3-4 bn in FY10 from cash generated by the base business. Besides this, the company has filed a draft prospectus with the SEBI for listing Glenmark Generics and part of the proceeds from this listing will also be used to retire debt.

On the R&D front, the company continues to be in talks with global pharma majors to garner some out-licensing deals. However, if one assumes 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.

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