IGI Logo

Better business mix/operating leverage drives profitability

IPO proceeds/internal accruals to lower net debt over the medium term

* Glenmark Pharma (GNP) delivered marginally lower-than-expected earnings in 4QFY21, led by subdued growth in the Domestic Formulation (DF) segment, flat RoW sales, and decline in the LatAm business. However, the outlook in the DF segment remains promising, aided by COVID-19 drugs. The Europe business is expected to deliver healthy growth on the back of niche launches and recovery in the base business, with the easing of lockdown restrictions. GNP intends to reduce net debt through free cash flow from its core operations as well as fund raising via the Glenmark Life Sciences IPO.

* We raise our FY22E/FY23E EPS estimate by 8% to factor in: a) strong growth in the DF segment, b) stable price erosion in the US base business, c) niche launches in Europe and d) lower financial leverage. We continue to value GNP at 14x 12-month forward earnings to arrive at our TP of INR580. We maintain our Neutral rating as current valuations adequately factors potential upside in earnings over the next two years.

Margin expansion led to earnings growth in 4QFY21

* Sales grew 5.5% YoY to INR28.6b (est. INR27.9b). YoY growth was driven by API, DF, and North America (NA) segments.

* API/DF/US sales grew 26.7%/7.7%/5.2% YoY to INR3b/INR8b/INR8b (12%/29%/28% of sales). Europe sales (15% of sales) grew 2.6% YoY, while RoW revenue (12% of sales) remained flat YoY and LatAm revenue (5% of sales) declined 27%.

* Gross margin expanded 320bp YoY to 67.2% due to superior product mix.

* EBITDA margin expanded 320bp YoY to 18.3% (est. 19.9%), with higher other expenses (up 320bp YoY as a percentage of sales), offset by lower R&D spend and employee cost (down 270bp/50bp YoY as a percentage of sales).

* EBITDA grew 28% YoY to INR5.2b (est. INR5.5b).

* PAT grew 30% YoY to INR2.3b (est. INR2.5b) due to better profitability.

* Sales/EBITDA/adjusted PAT grew 5%/46%/42% YoY in FY21 to INR109b/INR22b/INR10b.

Highlights from the management commentary

* GNP guided at overall sales growth of 10-12% YoY in FY22, with US sales growth of 10%.

* The company is guiding at 19-20% EBITDA margin in FY22.

* Other expense to be ~27% of sales in FY22 v/s 25% in FY21.

* Absolute R&D spend to remain at FY21 levels in FY22 (10-11% of sales).

* It had a net debt of INR35b at the end of FY21.

* GNP indicated a net debt reduction of INR10b-12b, considering: a) free cash flow to be generated from core operations, and b) receipt of money from the upcoming Glenmark Life Science IPO.

Valuation and view

* We raise our FY22E/FY23E EPS estimate by 8% to factor in: a) strong growth in the domestic segment, partly aided by COVID-19 products (FabiFlu), b) growth in US Formulations, driven by normalized levels of price erosion in the Dermatology portfolio and product launches, c) higher growth in Europe, with niche launches, and d) lower interest outgo, with debt reduction.

* We expect 12% earnings CAGR, led by 4%/8%/12.5% sales CAGR in US/DF/Europe segments over FY21-23E, with a stable margin.

* We expect return ratios to remain at mid-teens. We continue to value GNP at 14x 12-month forward earnings to arrive at our TP of INR580. We maintain our Neutral rating.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer