Sales beat, Oneoff play spoilsport with headline margins May 15, 2016 Surajit Pal surajitpal@plindia.com +912266322259 Rating BUY Price Rs869 Target Price Rs1,186 Implied Upside 36.5% Sensex 25,490 Nifty 7,815 (Prices as on May 13, 2016) Trading data Market Cap. (Rs bn) 245.1 Shares o/s (m) 282.2 3M Avg. Daily value (Rs m) 490 Major shareholders Promoters 45.00% Foreign 20.81% Domestic Inst. 20.96% Public & Other 13.23% Stock Performance (%) 1M 6M 12M Absolute 11.3 (7.5) (2.3) Relative 11.9 (7.1) 4.2 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 49.4 49.8 0.8 2018 65.0 52.8 23.0 Price Performance (RIC: GLEN.BO, BB: GNP IN) Sales in line on better performance in key geographies: Glenmark reported sales of Rs22.8bn Vs our estimates of Rs18.3bn in. Major boost in sales came from Latam (+33%, excluding Venezuela), Europe (+11%), India formulations (+23%) and API (+44%). Revenues from US generics were also better. The company stopped shipment of exports to Venezuela and focused on disbursing current inventory and realisation of receivables. US markets show signs of a new dawn: With USD sales growth of 5% QoQ and 13% YoY in, the management guided for core US generic portfolio growth of 1520%. in addition, with 180days exclusivity sales of gzetia in H2FY17E, the management guided for US$200m sales of Zetia during its exclusivity sales in FY17E and FY18E. Glenmark s key launches of Yaz and Vancomycin as well as benefits of price rise and volume growth in Mupirocin will continue to drive US sales from USD97m/quarter to 105110m/quarter in FY17E. We expect some positive surprise such as approvals in Nitroglycerine in H1FY17E. Currencies, oneoff legal costs complicated headline margins: With strong headwinds in global commodity prices, Venezuelan Bolivar (VEF) remains cause of concern with official rate devalued by 67% to 10VEF/US$ while DICOM rate at global market is 272VEF/US$. Glenmark continues to believe that pending repatriation, the cash lying in the Venezuelan subsidiary will be recoverable with new Indian govt initiatives for commodities swap arrangement though, the time period of recovery is not clear. The company has already provided for Rs1.24bn currency devaluation and legal settlement costs in. Valuation Key drivers to maintain momentum, Maintain BUY, TP Rs1,186: With guidance of strong traction in US generics in H2FY17E, we believe new products will boost current growth drivers such as Indian formulations, Asia and Africa markets. With Rs90m/month sales of Teneligliptin, the launch of antidiabetic brand to compensate more than the loss of sales in Sitagliptin in FY17E. We believe that launch from new approvals is likely to drive growth in Latam without Venezuela. We maintain BUY and retain TP at Rs1,186. Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 65,953 75,909 97,538 115,387 Growth (%) 9.8 15.1 28.5 18.3 EBITDA (Rs m) 11,751 13,741 22,558 28,267 PAT (Rs m) 4,753 7,021 13,945 18,337 EPS (Rs) 17.5 24.9 49.4 65.0 Growth (%) (12.4) 42.0 98.6 31.5 Net DPS (Rs) 2.0 2.0 2.0 2.0 Result Update (Rs) 1,400 1,200 800 600 400 200 0 May15 Jul15 Sep15 Nov15 Jan16 Mar16 May16 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 17.8 18.1 23.1 24.5 RoE (%) 15.9 19.3 26.6 25.9 RoCE (%) 8.8 10.1 16.1 18.5 EV / sales (x) 4.1 3.7 2.8 2.3 EV / EBITDA (x) 23.0 20.5 12.0 9.3 PE (x) 49.6 34.9 17.6 13.4 P / BV (x) 7.9 5.7 3.9 3.1 Net dividend yield (%) 0.2 0.2 0.2 0.2 Source: Bloomberg Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Result Overview (Rs m) Y/e March YoY gr. (%) FY16 FY15 YoY gr. (%) Net Sales 22,891 17,538 30.5 17,643 75,909 65,953 15.1 Raw Material 7,337 3,818 92.2 5,281 23,614 19,344 22.1 % of Net Sales 32.1 21.8 29.9 31.1 29.3 Personnel Cost 3,489 2,542 37.3 3,449 13,782 12,024 14.6 % of Net Sales 15.2 14.5 19.5 18.2 18.2 Others 9,224 8,584 7.5 5,356 24,773 22,833 8.5 % of Net Sales 40.3 48.9 30.4 32.6 34.6 Total Expenditure 20,050 14,944 34.2 14,085 62,168 54,201 14.7 EBITDA 2,840 2,594 9.5 3,557 13,741 11,751 16.9 Margin (%) 12.4 14.8 20.2 18.1 17.8 Depreciation 781 645 21.1 627 2,691 2,600 3.5 EBIT 2,060 1,949 5.7 2,931 11,050 9,151 20.7 Other Income 293 223 31.2 162 787 564 39.5 Interest 475 397 19.7 469 1,789 1,902 (5.9) PBT 1,878 1,776 5.7 2,624 10,047 7,814 28.6 ExtraOrd. Inc./Exps. (1) 1,871 (0) (2) 1,870 Total Taxes 448 (201) NA 921 3,028 1,190 154.4 ETR (%) 23.9 NA 35.1 30.1 15.2 Reported PAT 1,430 106 1,247.8 1,703 7,021 4,753 47.7 Exhibit 2: Major Sources of Revenue (Rs m) Y/e March YoY gr. (%) FY16 FY15 YoY gr. (%) Glenmark generics 8,748 6,911 26.6 7,538 30,886 26,450 16.8 US generics 6,520 5,363 21.6 6,089 24,203 20,398 18.7 API & Other Op. income 2,229 1,547 44.0 1,450 6,683 6,053 10.4 Glenmark Pharma (Branded generics) 13, 10,847 24.4 10,244 44,791 39,698 12.8 India Formulations 5,398 4,406 22.5 4,880 21,093 17,490 20.6 SemiReg market 2,980 2,198 35.6 2,363 9,033 8,123 11.2 Latam formulations 2,416 1,810 33.5 1,237 7,495 7,640 (1.9) EU branded generics 2,705 2,433 11.2 1,764 7,171 6,445 11.3 Out license fees 819 819 299 173.8 Gross Revenues 23,067 17,758 29.9 17,783 76,496 66,448 15.1 May 15, 2016 2
Key takeways from Conference call Management guided for more than 25% YoY sales growth in FY17E. The company expects 15% sales growth in core business while additional sales will be accrued from oneoff sales in Zetia from December 2016. Its sales growth in key geographies such as core US sales to grow at 1520%, India to grow more than 15% and Russia to grow at more than 20% in FY17E. Latam sales to grow at 1015% and more than 20% without and with Venezuela sales in FY17E. With changes in accounting policy, the company have started including export incentives at 2.2% of exports in other income Glenmark has accounted oneoff adjustments of Rs1.24bn in, of which Rs840m belonged to devaluation of receivables due to depreciation in official rate of VEF vs US$. It also has accounted for oneoff forex loss of Rs1.35bn in FY16 With overall oneoff adjustment of Rs4.6bn in FY16, Glenmark accounted Translation loss (FCTR) of Rs3bn in Balance Sheet, of which Rs1.2bn belongs to Venezuela business With approval of own products, Glenmark s guidance of more than 20% sales growth in Russia is supported by launch of its respiratory drug gseretide. The company has filed for launching gseretide in other European market as defined by its partnership with Celon for 15 European markets Glenmark s intangible assets increased by Rs2.98bn in FY16. IFRS allows intangible assets with specific time period as against infinite time period allowed in IGAAP Management guided for 2225% tax rate in FY17E and capex of Rs7bn in FY17E vs Rs9bn in FY16. It guided for positive Free cash flow and lower Debt post success of Zetia exclusivity sales in FY18E Receivable days and Inventory days are maintained at 120 days and 75 days respectively. Net working capital (NWC) are currently at 99 days May 15, 2016 3
Exhibit 3: India formulation sales and growth 7,000 6,000 5,000 4,000 30 25 20 15 5 5 Exhibit 4: US Generics: Sales and Growth Sales (US$ m) 120 100 80 60 40 20 40 30 20 Exhibit 5: SemiReg Mkts: Sales, Growth 4,000 3, 14 12 8 6 4 2 2 4 6 May 15, 2016 4
Exhibit 6: Latam: Sales, Growth 15 5 5 Exhibit 7: API: Sales, Growth 7 6 5 4 3 2 1 1 2 Exhibit 8: Ovearall Sales, Growth 25,000 20,000 15,000 10,000 5,000 12 8 6 4 2 May 15, 2016 5
Exhibit 9: EBITDA, margin EBITDA (Rs m) Margin (%) (RHS) 4, 4,000 3, 4 35.0 3 25.0 2 15.0 1 5.0 Exhibit 10: R&D exps, % of sales Expenses % of sales (RHS) 12.0 1 8.0 6.0 4.0 2.0 May 15, 2016 6
Income Statement (Rs m) Net Revenue 65,953 75,909 97,538 115,387 Raw Material Expenses 19,344 23,614 26,708 32,967 Gross Profit 46,608 52,296 70,830 82,420 Employee Cost 12,024 13,782 16,300 19,262 Other Expenses 22,833 24,773 31,972 34,891 EBITDA 11,751 13,741 22,558 28,267 Depr. & Amortization 2,600 2,691 2,915 3,224 Net Interest 1,902 1,789 1,862 1,429 Other Income 564 787 812 836 Profit before Tax 7,814 10,047 18,593 24,450 Total Tax 1,190 3,028 4,648 6,112 Profit after Tax 6,623 7,019 13,945 18,337 ExOd items / Min. Int. (1,870) 2 Adj. PAT 4,753 7,021 13,945 18,337 Avg. Shares O/S (m) 271.3 282.2 282.2 282.2 EPS (Rs.) 17.5 24.9 49.4 65.0 Cash Flow Abstract (Rs m) C/F from Operations 3,641 7,711 (7,805) 15,086 C/F from Investing (639) (3,932) (7,044) (7,050) C/F from Financing 3,178 13,884 (6,256) (7,851) Inc. / Dec. in Cash 6,180 17,663 (21,105) 184 Opening Cash 8,145 14,325 31,988 10,883 Closing Cash 14,325 31,988 10,883 11,067 FCFF (4,627) (340) 569 9,975 FCFE 5,553 1,542 (6,924) 1,318 Key Financial Metrics Growth Revenue (%) 9.8 15.1 28.5 18.3 EBITDA (%) (10.8) 16.9 64.2 25.3 PAT (%) (12.3) 47.7 98.6 31.5 EPS (%) (12.4) 42.0 98.6 31.5 Profitability EBITDA Margin (%) 17.8 18.1 23.1 24.5 PAT Margin (%) 7.2 9.2 14.3 15.9 RoCE (%) 8.8 10.1 16.1 18.5 RoE (%) 15.9 19.3 26.6 25.9 Balance Sheet Net Debt : Equity 1.2 0.8 0.4 0.2 Net Wrkng Cap. (days) (8) 52 205 184 Valuation PER (x) 49.6 34.9 17.6 13.4 P / B (x) 7.9 5.7 3.9 3.1 EV / EBITDA (x) 23.0 20.5 12.0 9.3 EV / Sales (x) 4.1 3.7 2.8 2.3 Earnings Quality Eff. Tax Rate 15.2 30.1 25.0 25.0 Other Inc / PBT 7.2 7.8 4.4 3.4 Eff. Depr. Rate (%) 6.1 5.6 5.3 5.2 FCFE / PAT 116.8 22.0 (49.7) 7.2. Balance Sheet Abstract (Rs m) Shareholder's Funds 30,003 42,703 62,131 79,373 Total Debt 42,849 44,731 37,238 28,582 Other Liabilities (1,533) (2,711) (2,688) (2,664) Total Liabilities 71,320 84,723 96,681 105,291 Net Fixed Assets 32,704 35,334 39,419 43,195 Goodwill 580 575 632 696 Investments 4,810 6,130 6,130 6,130 Net Current Assets 33,225 38,943 50, 55,271 Cash & Equivalents 7,681 8,618 10,883 11,067 Other Current Assets 45,551 50,485 49,273 55,235 Current Liabilities 20,007 20,160 9,656 11,032 Other Assets Total Assets 71,320 80,982 96,681 105,291 Quarterly Financials (Rs m) Y/e March Net Revenue 16,424 18,952 17,643 22,891 EBITDA 3,468 3,876 3,557 2,840 % of revenue 21.1 20.5 20.2 12.4 Depr. & Amortization 590 694 627 781 Net Interest 419 426 469 475 Other Income 182 150 162 293 Profit before Tax 2,640 2,906 2,624 1,878 Total Tax 731 929 921 448 Profit after Tax 1,910 1,978 1,703 1,430 Adj. PAT 1,910 1,978 1,703 1,430 Key Operating Metrics (Rs m) Generics 29,096 34,320 48,364 59,424 US Formulations 20,398 24,203 37,056 46,822 EU Formulations 2,646 2,940 3,442 3,958 LatAm Formulations 495 519 561 APIs 6,053 6,683 7,348 8,083 Branded 37,052 41,357 48,057 54,599 India Formulations 17,490 21,093 25,100 28,614 ROW Formulations 8,123 9,033 9,936 10,929 LatAm Formulations 7,640 7,001 8,196 9,507 EU Formulations 3,800 4,231 4,824 5,548. May 15, 2016 7
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