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In-line 1QFY22; DF drives overall earnings growth

Niche launches in EU/US to drive performance in international markets

* Glenmark Pharma (GNP) delivered in-line 1QFY22 earnings, led by strong growth in Domestic Formulations (DF) and ROW sales. GNP witnessed benefit from Fabiflu sales due to COVID, in addition to an improvement in core therapies in the DF segment. GNP is on track for its plan to reduce net debt by INR16b using proceeds from the IPO (~INR12b) and internal accruals (~INR4b).

* We raise our EPS estimate for FY22/FY23 by 3%/2%, factoring in a) the outperformance of DF, b) better traction in the US, c) niche launches and market expansion in Europe, and d) a reduction in financial leverage. We continue to value GNP at 14x 12M forward earnings to arrive at Target Price of INR600. We maintain Neutral as the current valuation adequately factors in a potential upside in earnings over the next two years.

DF drives growth on the back of COVID-19 drug Fabiflu

* Revenues grew 26.4% YoY to INR29.7b (our estimate of INR30.4b). YoY growth was driven by the India, API, and RoW segments.

* DF revenue grew 57% YoY to INR12.3b (41% of sales). API sales grew 29.5% YoY to INR3b (10% of sales). RoW sales grew 26.7% YoY to INR2.7b (9% of sales). Europe Generics revenue grew 11.7% YoY to INR3.1b (10% of sales). US revenues grew 6.1% YoY to INR7.9b (USD99m; 27% of sales).

* Gross margins contracted 390bps YoY to 61.6% due to the product mix.

* The EBITDA margin contracted at a lower rate of 110bp YoY to 19.3% (our estimate: 19%), with lower R&D spend / staff costs (down 130bp/160bp YoY as a percentage of sales).

* EBITDA grew 20% YoY to INR5.7b (our estimate: INR5.8b).

* Adjusted for forex gains of INR389m, PAT grew 36% YoY to INR2.8b (our estimate: INR2.7b) owing to higher other income.

Highlights from management commentary

* GNP guided for revenue growth of 10–15% in FY22 and an EBITDA margin at the same level as that in FY21 (~19.5%).

* The company expects 1–2 out-licensing deals in Ichnos in FY22.

* R&D expense for FY22 would be 10.5–11% of sales.

* INR3.5b of sales and EBITDA of INR700m are expected from Fabiflu for 1QFY22.

* Growth ex-Fabiflu would be 10–12% in FY22.

Valuation and view

* We raise our EPS estimate for FY22/FY23 by 3%/2%, factoring in a) better outlook in the US with new launches, b) faster growth in Europe, with niche launches, and c) a lower interest outgo, with debt reduction aided by Glenmark Life Sciences IPO proceeds.

* We expect a 13% earnings CAGR, led by a 6%/8%/11% sales CAGR in the US/DF/Europe segments over FY21–23E. With stable EBITDA margins, we expect return ratios to remain in the mid-teens.

* We value GNP at 14x 12M forward earnings to arrive at TP of INR600. We maintain Neutral on a limited upside from current levels.

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