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In-line quarter; deleveraging key focus

Glenmark Pharma’s (Glenmark) Q1FY22 performance was broadly in line with our estimates led by growth in India. Revenue grew 26.4% YoY to Rs29.7bn (I-Sec: Rs28.9bn), EBITDA margin improved 80bps QoQ to 19.3% (I-Sec: 20.4%) and adj. PAT increased 49.0% to Rs3.1bn. India business grew 57.1% faster than the industry led by covid-19 related drugs. US business declined 2.8% QoQ despite high price erosion supported by ramp up in new products.

The focus of the management is on deleveraging the balance sheet driven by ~Rs4bn FCF in FY22E, ~Rs12bn from IPO of API business and potential capital raise in ICHNOS Sciences (R&D arm) along with out-licensing of two molecules in FY22E which would be positive trigger. Retain ADD.

* India grows strong led by covid-19 drugs: India business grew 57.1% YoY and 48.7% QoQ led by Rs3.5bn revenue generation by Fabiflu. Adjusting for it, growth stood at ~12-13%. The company is gaining healthy traction on its innovative antidiabetic product, Remogliflozin and its line extension. We expect a CAGR of 11.8% over FY21-FY23E in India business. US revenue declined 2.8% QoQ to US$107mn with higher than expected price erosion partially offset by new launches like Arformoterol, Theophyline, Rufinamide, etc. We expect 5.8% CAGR over FY21- FY23E in US revenue to US$465mn driven by new launches. EU and ROW grew 11.7% and 26.7% YoY respectively.

* Covid-19 products kept margins in check: Gross margin dropped 370bps YoY (- 550bps QoQ) led by higher proportion of Fabiflu sales in India. Cost rationalisation cushioned EBITDA margin which dropped 110bps YoY but grew 80bps QoQ to 19.3%. We believe that the cost saving initiatives are partially sustainable which could keep EBITDA margins stable at ~19% over the medium term. Successful outlicensing of innovative molecules would help in keeping R&D spend low and provide upside to margins.

* Outlook: We estimate 9.4% revenue and 9.0% PAT CAGRs over FY21-FY23E, respectively, with stable EBITDA margin of ~19%. The company has successfully completed IPO of the API subsidiary and expects to reduce debt by ~Rs12bn from its proceeds. It is actively looking for partnering products from ICHNOS Sciences (innovative R&D arm) in the US in FY22 which would provide additional funds. Company aims to reduce ~Rs16bn of debt in FY22 and healthy cash generation in the coming years will reduce debt further.

* Valuations and risks: We remain positive on stock given strong India business and attractive valuation of 13.7xFY23E earnings. We largely maintain our estimates and reiterate ADD on the stock with a revised target price of Rs649/share based on 16xFY23E earnings (earlier: Rs655/share). Key downside risks: Higher pricing pressure in the US and regulatory hurdles.

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