CMP: Rs230 Target Price: Rs241
Glenmark posted disappointing set of numbers, significantly below our/market estimates. Revenue fell by 14% to Rs 4911mn because of absence of NCE income (Rs609mn in Q4FY08) and a base business decline across all segment (decline by 4%), except its domestic formulation business (grew by 12%). Operating margins were affected because of a) Inventory write-down for the US and LatAm market (Rs700mn), b) Closure of operations in Australia and China (Rs600mn) and c) A charge back of Rs1.17bn on account of price erosion in Oxcarbazepine. This has resulted 21 percentage point contraction in EBIDTA margins to 17.7% in Q4FY09. Pressure in top-line and operating margins coupled with higher interest cost (up by 364%) has led to 96% decline in APAT to Rs91mn in Q4FY09. For FY09, Revenue was up by 6% to Rs20.9bn. excluding NCE income, revenue grew by 21%. Adjusted EBIDTA for FY09 de-grew by 27% to Rs5850mn. APAT de-grew by 55% to Rs2830mn. On the back of lower than expected performance, we have downgraded our FY10E earning estimates by 25% to Rs12.8 and introduced our FY11E earning estimates (EPS of Rs17.2 for base business). We are positive on the outcome of Melogliptin Phase IIb clinical data and have revised the NPV of R&D assets from Rs44 per share to Rs69 per share. However, we feel that monetizing of R&D opportunity in the near term will remain a key challenge for the company. Maintain Accumulate rating with a price target of Rs241 (10x FY11E EPS ex. R&D NPV). Positive data for Oglemilast and out-licensing deal for Melogliptin will be key upsides.
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