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India outperforms, valuations remain attractive
Glenmark Pharma’s (Glenmark) Q3FY20 performance was above our estimates due to higher domestic sales growth. Revenues grew 7.1% YoY, EBITDA margin stood at 16.1%, in line with our estimate and PAT dropped 11.0% to Rs1.9bn (ISec: Rs1.7bn). India business grew 18.2% outperforming the industry and our estimates with strong traction in new products especially Remogliflozin. US business declined due to loss of sales of Ranitidine and high price erosion in derma portfolio. We expect US revenues to remain stable in FY20E-FY21E and improvement in India growth should help lift margins. ICHNOS Sciences, its innovative wing has started its funding process to make itself a self-sufficient business. Maintain BUY on attractive valuations with a revised target price of Rs422/share (earlier: Rs434).
* India outperforms, US disappoints: India business grew 18.2% YoY. Company has been gaining strong traction on an innovative anti-diabetic product, Remogliflozin etabonate. Company is also launching it with a combination of Metformin. We expect a strong growth CAGR of 12.8% over FY19-FY22E. US revenues declined 6.6% QoQ to US$113mn due to price erosion in key derma products and loss of sale of Ranitidine. New product launches have supported growth to some extent. We expect a moderate 3.6% CAGR over FY19-FY22E in US revenues driven by new launches despite continued erosion in the base business. RoW remained flat while EU declined 4.0% YoY. Latam grew 54.1% with new launches.
* Margins remain stable: EBITDA margin declined 90bps YoY to 16.1%, but remained stable QoQ. Gross margin improved 60bps QoQ to 64.9% (-80bps YoY). We expect EBITDA margin to gradually improve to 16.8% with India growth exceeding industry growth, decline in R&D spend as a percentage of sales, and cost optimisation exercises undertaken by the company.
* Outlook: Management has guided for drop in personnel and R&D expenses as a percentage of sales in FY21 with its cost control initiatives. We estimate 8.4%/11.4% revenue/PAT CAGRs over FY19-FY22E with margin expansion of 50bps. ICHNOS Sciences has started its fund raising process to become self-sufficient while the company tries to monetise non-core assets to pare down debt.
* Valuations and risks: We largely maintain our revenue expectations, but cut EPS estimates by 2-5% due to higher S,G&A expenses. At current market price valuations remain attractive, we maintain BUY with a revised target price of Rs422/share based on 14xSep’21E earnings (earlier: Rs434/share). Key downside risks are: higher pricing pressure in the US, and regulatory hurdles.
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