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Glenmark Pharmaceuticals Equity Research

HomeCompanyGlenmark Pharmaceuticals Equity Research

Date of Research – 14 January 2016

Price – Rs. 864.50

About the Company

Founded in 1977, Glenmark Pharmaceuticals Limited (“Glenmark Pharma” or the “Company”) has a significant presence in branded generics markets across emerging economies including India. Its subsidiary, Glenmark Generics Limited markets APIs to regulated and semi-regulated countries.

Glenmark has thirteen manufacturing facilities in four countries and has five R&D centres. The Company operates in three segments: specialty, generics and out-licensing. Specialty segment includes manufacture and distribution of branded products focused on range of therapeutic segments, such as dermatology, internal medicine, respiratory, pediatrics, diabetes, gynecology, oncology.

Generics segment consists of finished pharmaceutical products ready for consumption by the patient, marketed under as generic finished dosages with therapeutic equivalence to branded formulations (generics). Out-licensing segment includes the discovery of new chemical entities for subsequent commercialization and out-licensing, as well as contract research services.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 5,013.72 6,006.93 6,644.77 7,560.00  9,185.68 
Expenses 4,002.35 4,696.88 5,420.15 6,126.14  7,148.98  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 1,011.37 1,310.05 1,224.62 1,433.86  2,036.70  
Depreciation 127.01 216.80 259.98 251.76  264.37  
Finance Costs 160.01 188.59 190.15 178.89  237.32  
Other income 9.37 9.75 6.88 20.00  37.37  
Exceptional items 217.54 187.09 –  80.95  
PBT 733.71 696.88 594.28 1,023.21  1,491.43  
Tax 110.72 151.27 119.04 303.30  382.68  
PAT (before Minority Interest and share of Associates) 623.00 545.60 475.24 719.91  1,108.75  
Profit/ (loss) attributable to Minority Interest 8.26 3.33 (0.07) (0.19)  – 
Share of profit / (loss) of Associates –  – 
Consolidated Profit / (Loss) for the year 614.74 542.27 475.31 720.10  1,108.75  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 20.17 21.81 18.43 18.97  22.17 
Net Profit Margin Ratio 12.43 9.08 7.15 9.52  12.07 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 27.05 27.09 27.12 27.13 28.22 
Other components of equity (99.48) – 
Reserves & Surplus 2,374.58 2,735.94 2,956.16 3,072.69 3,028.23 
Net worth (shareholders funds) 2,401.63 2,763.03 2,983.28 3,000.34 3,056.44 
Minority Interest 25.00 24.36 13.28 (0.19) (0.30) 
Long term borrowings 1,312.47 1,920.30 2,428.66 2,574.38 2,487.30 
Current liabilities 1,901.74 2,180.49 2,949.17 3,711.29 4,067.24 
Other long term liabilities and provisions 92.56 106.00 52.13 121.92 76.99 
Deferred Tax Liabilities 150.03 176.84 207.08 279.77 157.70 
Total Liabilities 5,883.43 7,171.00 8,633.60 9,687.51 9,845.37 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 2,424.76 2,768.21 3,035.69 3,270.44 3,059.18 
Noncurrent Investments 33.24 36.05 17.20 
Current assets 2,947.15 3,749.28 4,762.69 5,323.27 5,911.05 
Long term advances and other noncurrent assets         617.40
Deferred Tax Assets 557.10 721.30 973.06 183.06 
Goodwill on consolidation (net) 60.86 60.37 60.20 57.97 57.48 
Total assets 5,883.43 7,171.00 8,633.60 9,687.51 9,845.37 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 22.65 21.48 24.15 21.97 25.87 
ROE / RONW 19.17 22.25 18.18 15.84 23.55 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 5,013.72 6,006.93 6,644.77 7,560.00  9,185.68 
Growth (%) 24.67 % 19.81 % 10.62 % 13.77 %  21.50 % 
PAT (Rs. Cr.) 623.00 545.60 475.24 719.91  1,108.75  
Growth (%) 34.18 % (12.42 %) (12.90 %) 51.48 %  54.01 %
Earnings Per Share – Basic (Rs. ) 22.71 20.01 17.52 25.65  39.29 
Earning Per Share – Diluted (Rs. ) 22.69 20.00 17.52 25.65  39.28 
Price to Earnings 20.39 28.52 49.38 30.97  16.02 

Dividend History

The Company has maintained an average dividend yield of 0.31 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Glenmark Pharma’s average current ratio over the last 5 financial years has been 1.47 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Glenmark Pharma’s average long term debt to equity ratio over the last 5 financial years has been 0.51 times which indicates that the Company operates with considerate level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Glenmark Pharma’s average interest coverage ratio over the last 5 financial years has been 4.64 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Glenmark Pharma reported a promoter holding of 46.50 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 42.81% (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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