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Glenmark Pharmaceuticals February 13, 2015 
Sales in line, headline margins miss: Glenmark reported 6% growth in sales and 47% decline in and PAT for Q3FY15. With 45% YoY reduction in Russia sales and currency turmoil in emerging markets, GNP’s consolidated sales were at Rs16.9bn vs our estimate of Rs17.1bn. The company’s adjusted EBITDA margin was 15.2%, much lower than our estimate of 18% due to one off provision of Rs1.06bn for strong devaluations in Rouble and other emerging market currencies. While the Rouble will continue to impact in Q4FY15E, the company’s improved prospects in long pending approvals for limited competition drugs in US and robust growth in Indian formulations will benefit earnings growth in FY16E‐17E. We maintain ‘Accumulate’ and retain TP at Rs786. 
Domestic formulaitons poised to grow: GNPs average growth slowed down in the last 4‐5 quarters to 15‐17% from the earlier levels of 18‐21%. With market share expansion in key therapeutic areas such as derma, cardiac, respiratory and anti‐infective, we expect the company to get back into the earlier growth levels of 18‐21% in FY16E‐17E. 
Delay in approvals impacted US sales: We expect new approvals of its long pending ANDAs will drive the US sales in FY16E‐17E. Despite launching key approvals such as Vanos and Telmisartan in Q1FY15, the company has been unable to draw growth in Q3FY15 and M9FY15. Glenmark’s US sales were US$81.8m and US$247.3m, declined 3% both in Q3FY15 and 9MFY15. 
Troubled markets (Russia, Venezuela) impacted sales, EBITDA: With 40% value erosion in Rouble, and depreciation in other ROW currencies, Glenmark’s sales were impacted by 5% in Q3FY15 due to translation loss of its ROW sales. Its one‐
off expenses of Rs1.06bn were on account of re‐evaluation of receivables in ROW markets during Jun‐Dec 2014 as Glenmark maintains 150 days of average receivables (without forex hedge) in ROW markets. Surajit Pal surajitpal@plindia.com +91‐22‐66322259 Rating Price Target Price Implied Upside Sensex Nifty Accumulate Rs766 Rs786 2.6% 29,095 8,806 (Prices as on February 13, 2015) Trading data Market Cap. (Rs bn) Shares o/s (m) 3M Avg. Daily value (Rs m) Major shareholders Promoters Foreign Domestic Inst. Public & Other Stock Performance (%) 1M 6M Absolute 5.2 9.1 Relative (0.9) (3.2) How we differ from Consensus EPS (Rs) PL Cons. 2016 37.4 37.9 2017 43.6 52.2 207.9 271.2 1122.2 48.31% 35.07% 5.89% 10.73% 12M 46.9 2.8 % Diff. ‐1.2 ‐16.6 Price Performance (RIC: GLEN.BO, BB: GNP IN) Key financials (Y/e March) Revenues (Rs m) Growth (%) EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth (%) Net DPS (Rs) 2014
60,052
19.8
13,179
5,423
20.0
(12.7)
2.0
2015E 70,025 16.6 13,935 7,125 26.3 31.4 2.0 2016E
81,941
17.0
18,109
10,156
37.4
42.5
2.0
2017E
92,771
13.2
20,595
11,815
43.6
16.3
2.0
2014
21.9
18.9
11.2
3.9
17.6
38.3
7.0
0.3
2015E 19.9 21.5 13.4 3.2 16.3 29.2 5.7 0.3 2016E
22.1
24.8
17.1
2.8
12.5
20.5
4.6
0.3
2017E
22.2
23.2
17.2
2.4
10.8
17.6
3.7
0.3
Source: Bloomberg Feb‐15
Dec‐14
Oct‐14
Aug‐14
Jun‐14
Apr‐14
Feb‐14
(Rs)
900
800
700
600
500
400
300
200
100
0
Profitability & Valuation EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) 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 Q3FY15 Result Update US opportunities to overcome headwinds in Russia, ROW
Exhibit 1:
Glenmark Pharmaceuticals Q3FY15 Result Overview (Rs m) Y/e March Q3FY15 Q3FY14
YoY gr. (%)
Q2FY15
9MFY15 9MFY14
YoY gr. (%)
Net Sales 16,921 16,012
5.7
16,715
48,415 43,021
12.5
5,560 5,373
3.5
5,495
15,527 14,291
8.6
32.9 33.6
32.9
32.1 33.2
3,165 2,735
15.7
3,553
9,482 7,488
21.3
19.6 17.4
32.2
4,407
14,249 11,970
26.4
29.4 27.8
Raw Material % of Net Sales Personnel Cost % of Net Sales 26.6
18.7 17.1
5,631 4,260
% of Net Sales 33.3 26.6
Total Expenditure 14,356 12,368
16.1
13,455
39,257 33,749
16.3
2,565 3,644
(29.6)
3,260
9,157 9,272
(1.2)
15.2 22.8
19.5
18.9 21.6
Others EBITDA Margin (%) Depreciation EBIT Other Income Interest PBT Extra‐Ord. Inc./Exps. 19.0
655 611
7.1
650
1,955 1,565
24.9
1,910 3,033
(37.0)
2,610
7,202 7,707
(6.6)
113 56
101.8
101
340 231
47.5
513 473
8.6
510
1,505 1,422
5.8
1,510 2,617
(42.3)
2,202
6,038 6,516
(7.3)
(1)
(0) 30
(23.4)
552
1,391 1,494
25.1
23.0 22.9
1,651
4,647 4,992
(0) (19)
Total Taxes 363 474
ETR (%) 24.0 18.1
Reported PAT 1,148 2,162
(46.9)
(6.9)
(6.9)
Source: Company Data, PL Research Exhibit 2:
Major Sources of Revenue (Rs m) Y/e March Q3FY15 Q3FY14
YoY gr. (%)
Q2FY15
9MFY15 9MFY14
YoY gr. (%)
Glenmark generics 6,537 7,373 (11.3)
6,671 20,191 20,747 (2.7)
US generics 5,072 5,214 (2.7)
5,076 15,034 15,262 (1.5)
EU generics ‐ 680 ‐
651 1,662 (60.8)
API & Other Op. income 1,465 1,479 (1.0)
1,595 4,506 3,823 17.9 Glenmark Pharma (Branded generics) 10,476 8,645 21.2 10,136 28,200 22,169 27.2 India Formulations 4,331 3,812 13.6 4,782 13,084 11,275 16.0 Semi‐Reg market 2,071 3,015 (31.3)
1,740 5,925 6,444 (8.1)
Latam formulations 2,344 1,139 105.8 2,309 5,830 2,984 95.4 EU branded generics 1,730 678 155.0 1,306 3,361 1,466 129.2 Out license fees ‐ ‐
‐
299 118 Gross Revenues 17,013 16,018 16,807 48,690 43,034 6.2 13.1 Source: Company Data, PL Research February 13, 2015 2
Income Statement (Rs m) Y/e March 2014 2015E 2016E
2017E
Net Revenue Raw Material Expenses Gross Profit Employee Cost Other Expenses EBITDA Depr. & Amortization Net Interest Other Income Profit before Tax Total Tax Profit after Tax Ex‐Od items / Min. Int. Adj. PAT Avg. Shares O/S (m) EPS (Rs.) 70,025 21,358 48,668 11,974 22,758 13,935 2,783 2,019 121 9,253 2,128 7,125 — 7,125 271.2 26.3 81,941
23,353
58,588
13,930
26,549
18,109
3,347
2,033
127
12,856
2,700
10,156
—
10,156
271.2
37.4
92,771
26,440
66,331
15,771
29,965
20,595
3,892
2,068
133
14,768
2,954
11,815
—
11,815
271.2
43.6
60,052 18,730 41,322 10,261 17,881 13,179 2,168 1,886 115 9,240 1,513 7,728 (2,305) 5,423 271.2 20.0 Glenmark Pharmaceuticals Balance Sheet Abstract (Rs m) Y/e March 2014 2015E 2016E
2017E
Shareholder's Funds Total Debt Other Liabilities Total Liabilities Net Fixed Assets Goodwill Investments Net Current Assets Cash & Equivalents Other Current Assets Current Liabilities Other Assets Total Assets 29,833 32,670 (4,488) 58,015 30,357 602 537 26,518 8,007 39,620 21,109 — 58,015 36,466 25,890 (4,749) 57,607 32,574 662 425 23,946 6,832 41,334 24,220 — 57,607 45,554
25,408
(5,374)
65,588
34,227
728
425
30,207
7,654
48,253
25,700
—
65,588
56,300
24,916
(6,242)
74,974
37,336
801
425
36,413
10,211
53,761
27,560
—
74,974
Quarterly Financials (Rs m) Y/e March Q4FY14 Cash Flow Abstract (Rs m) Y/e March C/F from Operations C/F from Investing C/F from Financing Inc. / Dec. in Cash Opening Cash Closing Cash FCFF FCFE 2014 2015E 2016E
2017E
8,537 (3,681) (2,960) 1,896 6,052 7,948 1,863 6,884 4,222 (5,159) (179) (1,116) 7,948 6,832 6,306 (474) 4,227
(5,053)
1,648
822
6,832
7,654
3,064
2,582
7,699
(7,060)
1,918
2,557
7,654
10,211
5,058
4,566
Key Financial Metrics Y/e March Growth 2014 2015E 2016E
Revenue (%) EBITDA (%) PAT (%) EPS (%) 19.8 25.7 (12.5) (12.7) 16.6 5.7 31.4 31.4 17.0
30.0
42.5
42.5
13.2
13.7
16.3
16.3
22.1
12.4
17.1
24.8
22.2
12.7
17.2
23.2
0.4
73
0.3
61
20.5
4.6
12.5
2.8
17.6
3.7
10.8
2.4
21.0
1.0
7.0
25.4
20.0
0.9
7.1
38.6
EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Q2FY15
Q3FY15
14,778 3,332 22.5 651 481 126 2,326 477 1,848 1,848 16,715
3,260
19.5
650
510
101
2,202
552
1,651
1,651
16,921
2,565
15.2
655
513
113
1,510
363
1,148
1,148
2014 2015E 2016E
2017E
Generics 28,016 US Formulations 20,270 EU Formulations 2,392 LatAm Formulations — APIs 5,353 Branded 31,688 India Formulations 15,105 ROW Formulations 9,869 LatAm Formulations 4,046 EU Formulations 2,668 Source: Company Data, PL Research. 31,079 21,731 2,635 — 6,713 38,946 18,126 11,696 6,433 2,691 28,601
25,544
3,057
—
—
45,683
21,389
13,802
7,399
3,094
31,167
27,652
3,515
—
—
52,896
24,597
16,010
8,730
3,559
Profitability Q1FY15 16,817 3,598 21.4 603 464 97 2,628 19 431 431 Net Revenue EBITDA % of revenue Depr. & Amortization Net Interest Other Income Profit before Tax Total Tax Profit after Tax Adj. PAT 21.9 9.0 11.2 18.9 19.9 10.2 13.4 21.5 0.8 47 0.5 84 38.3 7.0 17.6 3.9 29.2 5.7 16.3 3.2 Eff. Tax Rate 16.4 Other Inc / PBT 1.2 Eff. Depr. Rate (%) 5.7 FCFE / PAT 126.9 Source: Company Data, PL Research. 23.0 1.3 6.5 (6.6) 2017E
Key Operating Metrics (Rs m) Y/e March February 13, 2015 3
Glenmark Pharmaceuticals Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage
50%
41.2%
PL’s Recommendation Nomenclature 40.0%
40%
30%
17.6%
20%
10%
1.2%
0%
BUY
Accumulate
Reduce
BUY : Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month Not Rated (NR) : No specific call on the stock Under Review (UR) : Sell
Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Surajit Pal (PGDBA, CFA, M.Com), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. 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