Glenmark Pharma reported results below than expectations due to high forex loss and adverse change in sales mix Sales (excluding out-licensing income) grew by 7.5% q-o-q and 32.8% y-o-y at Rs 1007.5 cr. The company received out-licensing income of Rs23.8 cr during the quarter as compared to 118.5 cr in Q2FY12. Core EBITDA margin (adjusted for forex loss and out-licensing income) has declined to 18.0% from 20.5% in Q2FY12 and 23.0% in Q3FY11.

Key Highlights

- During the quarter the company reported forex loss of Rs102 cr (MTM on foreign currency loans) which negated the healthy sales growth of 32.8% y-o-y

- EBITDA margin has declined due to lower contribution of high margin business like India (grew by 12.8% y-o-y in 9MFY12), US (42%) and higher contribution by low margin business like SRM (48%), LatAm (55%)

- High R&D cost also affected the EBITDA margins during the quarter. The company spent Rs76 cr on R&D in Q3FY12 i.e. 7.5% of sales as compared to 6.9% in Q2FY12 and 4.6% in Q3FY11. Company has indicated of spending Rs75 cr in Q4FY12 taking the full year figure to Rs261 cr as against the earlier guidance of Rs200 cr.

- Management has indicated that one of the reason for subdued performance of India business was inventory rationalization to reduce accounts receivable (which came down to 116 days from 125 days earlier)

- Management has indicated that going forward margins would improve from here onwards especially from FY13 onwards EBITDA margins are expected to improve substantially on year on year as the company is currently focusing on growth at the cost of margins.

Valuation & Recommendation

Nirmal Bang believe that major headwinds are factored in the price. With future triggers like improving margins, positive sales mix and better balance sheet position, they expect company to report better numbers.

At CMP the stock trades at 20.8 times FY12E and 13.3 times FY13E. Nirmal Bang believe the stock is available at attractive valuations. They are rolling their price target to FY13E. Based on their EPS of Rs22 for FY13E target price comes to Rs364 (earlier Rs358). Nirmal Bang maintain their HOLD rating on the stock.