>GLENMARK PHARMACEUTICALS

Recommendation: Buy
Price target: Rs468
Current market price: Rs409

Steady growth in core business

Result highlights

• Impressive growth continues in core business: The net sales of Glenmark Pharmaceuticals (Glenmark) grew by 19.8% year on year (YoY) to Rs1040.4 crore in Q1FY2013. The growth was mainly driven by the generic business, which grew by 57.67% YoY to Rs530 crore. However, the specialty business (excluding the licencing income) increased by 22.8% YoY to Rs504.645 crore in the same period. The specialty business includes the Indian formulation business, which grew by 24.1% YoY during the quarter. Though the growth of the specialty business is better than the industry growth of 15%, but the same falls short of our expectation.
  
  
• Core OPM declines 380bps YoY, yet better than expected: The core operating profit margin (OPM; excluding the out-licencing income) declined by 380 basis points YoY to Rs20.7 due to a high base effect. However, it was better than our expectation of 19.1%.
  
  
• Forex loss and lower licencing income weaken profit; adjusted core PAT jumps 44%: The company provided Rs55 crore for foreign exchange (forex) loss during the quarter as compared with a forex gain of Rs9 crore in Q1FY2012. Moreover, the company did not receive any licencing income during this quarter as compared with that of Rs111.2 crore in Q1FY2012 (which made for the high base). This caused the net profit to decline by 62.8% YoY to Rs78.2 crore. However, the core net profit (excluding the out-licencing income and the forex loss/gain) jumped by 44.3% YoY to Rs129.6 crore, which is virtually in line with our expectation of Rs132 crore.
  
  
• No change in growth guidance; we maintain estimates and price target: The management of Glenmark is confident of carrying forward the same level of performance and therefore no change has been made in the growth guidance. Earlier the management had given a guidance of a 22-25% growth in the revenue in FY2013. We maintain our revenue and profit estimates for FY2013 and FY2014, and expect its revenues to grow at a compounded annual growth rate (CAGR) of 16% over FY2012- 4E from the base business (without considering the out-licencing income). The core profit after tax (PAT) is expected to grow at a CAGR of 19% over this period. We have a price target of Rs468, which implies 15x core business' EPS for FY2014 and values the research and development (R&D) pipeline at Rs88 per share. 

RISH TRADER