Revenues and earnings were in line though the weakness in US business and marginal EBITDA margin contraction was disappointing. Management guides for a robust 25% FY12 growth in US and India. Stock appears attractively priced trading at 25% discount to sector. Maintain Buy with TP of Rs400.

Overall revenues in line but weak US growth disappoints
􀀟 Glenmark reported 3QFY11 revenues of Rs7.5bn (+17% yoy) in-line with our estimate of Rs7.6bn. The comparable quarter last year included NCE milestone receipt of US$5m, excluding which revenue growth was 21%.

􀀟 Domestic formulation business (30% of 9MFY11 revenues) was strong reporting impressive revenue growth of 30% (revenues were Rs2.4bn)

􀀟 We were however disappointed with the weak US business (28% of 9MFY11 revenues) which grew by only 8% yoy

􀀟 The semi-regulated specialty markets (13% of 9MFY11 revenues) were also robust, reporting revenues of Rs1.2bn (+27% yoy)

􀀟 API business (10% of 9MFY11 revenues) revenues declined 3% yoy

Marginal EBITDA margin contraction was a surprise
􀀟 We were partially disappointed with the marginal EBITDA margin (ex-NCE) contraction of c130bps qoq but we do note that the EBITDA margin contraction has been relatively lower compared to some of its larger peers.

􀀟 Glenmark reported EBITDA of Rs1.7bn (+2% yoy); excluding NCE contribution in the comparable quarter last year, EBITDA growth was 19%

􀀟 Core EBITDA margin (i.e. ex NCE) was 22.2% vs. 22.7% in 3QFY10 and 23.5% in 2QFY11

􀀟 Tax rate came in at 19.4% vs. 4.5% in 3QFY10 and 20.3% in 2QFY11

􀀟 The company reported PAT of Rs1.1bn (+16% yoy) in line with our estimate. Ex-NCE, PAT growth was 52%.

􀀟 Other income of Rs342m consisted of forex gain of Rs180m (forex loss of Rs120m in 3QFY10). However, it is not clear if the forex gain/loss was realised or was mark-to-market (MTM) gain/loss. If we treat this as extra-ordinary, core PAT would be Rs952m and core PAT (ex-NCE) growth would be 16%.

Key takeaways from management conference call
􀀟 Management attributed the weak US business growth to: (a) adverse currency movement of c5%; (b) withdrawal of Nitrogylcerine product from market in 3QFY11 following US FDA instructions (unapproved product); and (c) time lag involved in taking the product from approval stage to production and subsequently to the market

􀀟 Management guides to 25% US & domestic business growth in FY12 as it seems confident that its US business performance in 4QFY11 and FY12 would be strong as it expects the spate of approvals that it has received in recent months to start contributing. Besides it also expects upsides from gMalarone (annual brand sales of US$62m) with launch in 3QCY11 and Oxycodone (annual market size of US$13m) where it expects defacto exclusivity for about three years as other players would have to re-enter the market after filing ANDA referencing Glenmark's product. It therefore guides to 25% US business growth in FY12. Management also expects 25% growth in domestic formulation business (vs. 30% in 3QFY11)

􀀟 R&D expense for the quarter was about Rs350m (Rs950m for 9MFY11). Management stated that it no longer is capitalising R&D spend on generics.

􀀟 Gross debt as of end-3QFY11 is Rs17.8bn while cash is at Rs1.1bn. Net debt of Rs16.7bn is marginally higher than Rs15.7bn as of end-2QFY11 due to redemption of FCCBs (US$30m) at premium. Net working capital holding period is at similar levels compared to the previous quarter.

We maintain our estimates, TP and Buy rating
􀀟 9MFY11 has met 74% and 78% of our FY11 revenue and earnings estimates respectively.

􀀟 The stock currently trades at 16.1x FY12F PE (25% discount to the sector). Excluding our value of R&D of Rs34, the stock trades at 14.3x FY12 PE (33% discount to the sector). Maintain Buy with TP of Rs400/share