Despite poor Q3, HDFC Securities maintains BUY rating for Glenmark; here's why

Last Updated: Mon, Feb 12, 2018 16:33 hrs
Glenn Saldanha, chairman and chief executive officer of Glenmark Pharmaceuticals Limited, listens to a question during the annual general meeting in Mumbai

HDFC Securities in a note has maintained a Target Price of Rs 780 on Glenmark and maintained a why. This is what they had to say:

Glenmark's Q3 (FY 2017-18) performance was sub-par, as pricing pressure in the US business, higher R&D and forex losses weighed on profits.

While Year on Year comparisons are not apt on account of the exclusive launch of gZetia in 3QFY17, the top-line declined by 2% quarter on quarter to Rs 21.7 billion (in-line with estimates).

EBITDA margin disappointed at 13.4% (vs expectation of 18%), down 260 basis point (2.6%) quarter on quarter.

Gross margins declined by 220 basis points quarter on quarter on the back of an inferior business mix, and R&D costs remained elevated (12.9% of sales vs 12% QoQ).

Profit after Tax was Rs 935 million, dragged down by 54% quarter on quarter by forex losses of Rs 480 million (vs gain in 2QFY18).

The management believes that 3QFY18 is the bottom for revenues and margins and HDFC Securities say they are inclined to agree.

However, the steep US erosion guidance of 13% going forward will only be offset with lucrative launches.

We continue to believe that Glenmark's push towards innovation and specialty is strategically sound. However, the capital allocation is weighing heavily on the business at present, especially at a time when launch momentum in the US is sluggish.

The lingering debt and deteriorating margin profile lead us to cut our earnings estimates by 22%/14% for FY19/20E and earnings multiple from 18x to 16x. Foresee 6%/14% revenue/earnings CAGR over FY17-20E.

Maintain BUY with a revised Target Price of Rs 780 (16x Dec-19E and Rs 135/sh for pipeline).

Highlights of the quarter

US business: There was a wide miss on management guidance of US$ 125 million in 3QFY18, with sales of US$ 113 million.

Glenmark has also guided for 13% base business erosion upto FY20E, much higher than peer commentary.

Generic competition in mupirocin is anticipated in the coming six months. Considering these factors, we have cut our US revenue estimates. Foresee 6% Compound Annual Growth Rate in the base business (ex-Zetia) over FY17 - 20E.

Other highlights:

(1) 8% of sales is being spent just on specialty and innovation R&D
(2) Expect gEpiduo to be an early FY19E launch
(3) GSP 301 filing in next 2-3 months
(4) Provided comprehensive response to the USFDA on Baddi 483, awaiting response
5) See domestic business growth at 15%+ for the coming years
(6) Cost optimisation measures will yet to play out, the benefit will be seen over the next couple of years
(7) DTA adjustment one-off was Rs 52 million. Near-term outlook: Management has guided for a margin recovery in 4QFY18. Execution remains to be seen.



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