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One-offs drive profitability; Core earnings yet to pick up
* Operationally in line:
Glenmark (GNP) reported revenues at INR25.4b (v/s est. of INR25.1b), up ~14% YoY, led by growth across geographies. Gross margin contracted by ~90bp YoY (+100bp QoQ) to 65.3%. EBITDA margin contracted at a lower rate of 30bp YoY to 15.7%, as decline in gross margin and higher other expense (+60bp YoY) was largely offset by lower employee expense (down ~120bp, as % of sales). Reported PAT increased ~93% YoY to INR4.1b, mainly due to forex gains (INR1.3b) and income from sale of its Ortho business (INR3.5b). The impact was partially offset by de-prioritization of certain intangible assets resulting in exceptional expense of INR1.8b. Adjusted for this, PAT declined marginally by ~4% YoY to INR2.1b (v/s est. of INR2.2b) due to higher depreciation (+10% YoY), interest expense (+22% YoY) and tax rate. For 1HFY19, sales stood at INR46.7b (+3% YoY), EBITDA at INR7.1b (-21% YoY) and adj. PAT at INR3.5b (-36% YoY).
* Growth across geographies:
US sales (32% of sales) at INR8.1b reported healthy growth of 11% YoY after four quarters (as base impact is no more) led by recently launched products. Domestic formulation (DF) business (31% of sales) grew ~10% YoY to INR7.8b, led by increased market share in key therapies. GNP maintained momentum in its Europe sales (10% of sales), up 30% YoY to INR2.6b. ROW sales (12% of sales) too reported robust growth of 21% YoY to INR3.1b as strong growth in Asia/Africa was offset to some extent by contraction in Russia sales. Favorable currency movement aided growth to some extent.
* Earnings call highlights:
(1) Net debt was up by INR1.7b QoQ to INR34.9b, (2) GNP has guided R&D spends at ~12% of sales in FY19 and FY20, (3) the company has PDUFA date for Ryaltris on 19th March 2019, (4) GNP witnessed ~10% price erosion in the US base business, and (5) two niche products are expected to be launched in 2HFY19, which will drive the US business.
* Maintain Neutral:
We have tweaked our estimates (+0.3%/+1.9%) for FY19/FY20 to INR29.8/36.3. We continue to value GNP at 15x P/E multiple (~35% discount to 3-year average) to factor in subdued return ratios as earnings CAGR is yet to pick up meaningfully and financial leverage remains elevated. We roll our target to 12M forward earnings to arrive at a price target of INR600 (from INR550). We maintain Neutral on limited upside from current levels. Out-licensing deals could act as positive triggers.
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