>GLENMARK PHARMACEUTICALS (ICICI SECURITIES)

CLEAN UP ACT

Glenmark’s Q4FY09 results were disastrous owing to one-time write-off of Rs1.6bn, including charge-back of Rs1.17bn for generic Trileptal. Excluding these, recurring consolidated PAT collapsed 97% YoY to a paltry Rs74mn, massively below I-Sec and Street estimates. With the management deciding to clean up its opaque and profit-boosting accounting policies (post Satyam fiasco), Q4FY09 results veered from the past trend – EBITDA margin (excluding R&D income) crashed 18pps to 13.6%. Hence, we cut FY10E & FY11E EPS 20% and 27% respectively. With investors’ risk appetite rising in the past three months, Glenmark has been re-rated along with broader indices and is likely to benefit from improving business performance from Q1FY10, a potential R&D deal and 1-2 key ANDA launches in FY10. We believe in Glenmark’s robust business model and world-class R&D pipeline. Glenmark remains our top large-cap BUYs in the sector.

■ Disastrous Q4FY09. After a disappointing Q3FY09, Glenmark shocked the Street with disastrous Q4FY09 results – reported loss of Rs1.2bn on the back of Rs1.6bn one-time write-offs. Recurring consolidate PAT was at Rs74mn versus Rs812mn in Q3FY09, which shows the degree of variance. However, the management expects strong performance recovery in Q1FY10 with improving demand from key markets, absence of one-offs and aggressive cost savings.

■ Despite short-term challenges, we expect Glenmark to succeed. Despite all the concerns, we continue to believe that Glenmark’s business model is among the best in the sector in India. Even after pruning FY09 forecast, Glenmark’s base business revenues and PAT have grown 6x and 8x respectively in the past five years. On the R&D side, it has bagged three world-class deals and earned cumulative ~US$110mn revenues (highest by an Indian pharma company). We expect Glenmark to succeed given its world-class R&D pipeline.

■ Worst may be behind; maintain BUY. We expect investor confidence to be largely restored in the next one year driven by improving visibility of key ANDA launches, recovering base business performance and at least one R&D licensing deal. We remain confident of Glenmark’s robust business model and success in the medium term. Maintain BUY. The stock trades at 13x FY11E P/E of generics business earnings. Our revised 18-month fair value of Rs312 implies 34% potential upside.

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