Glenmark LifeSciences Ltd Q2FY22 result came amidst rising raw materials/ input cost. While the cost of solvent increased significantly for the company, other input cost such as coal also went up in a straight line, but the company was still able to pass on the cost, improving the gross profit marginally. Has it not for the sudden increase in cost, the gross margin would have been much much better.
This according to the management was on account of non-commoditized nature of their products.
You can read my blog about Q1FY22 Analysis of Glenmark Lifesciences Ltd:
As mentioned in my earlier blog, Glenmark Lifesiences derives revenue from 2 segments:
Generic API (90% of Revenue)
CDMO (10% of Revenue)
The Q2FY22 revenue increased by just 8% primarily due to capacity constraint. Capacities are running at 90%+.
Generic API business increased by 3.9% yoy. Business saw strong growth in Latin America, Japan & North America. With the decline in sales of the API for Favipiravir(the COVID DRUG), the margin increased due to sales of higher value products.
The CDMO biz which lagged last quarter saw very good growth of 85% on a YoY basis. Glenmark LifeSciences is working on 3 commercial projects with multinational and specialty pharmaceutical companies. Fourth project to be commercial by Q4 FY22 & which is massive in size.
CDMO biz is still quite small at just about 9% of total revenue. Given the small base, this is likely to show higher growth.
Parent 'Glenmark Pharmaceuticals Ltd' continues to be the largest client with 40% of revenue of 'Glenmark LifeSciences Ltd'. Commenting on the same, the management said, this is going to continue and can only go down to minimum of 30-35% over the years.
Product pipeline:
Company have been moving towards complex API (higher margins) and filed one DMF(US) in Q2FY22.
3 iron compounds are in the pipeline as well as 3 anti-cancer drug. In total, the company has filed 5 DMFs & CEPs across various markets in the current quarter. Company has a total filing of 412 products.
Glenmark Lifesciences has 26 product in development pipeline including 4 iron complex and 7 oncology products.
CAPEX:
Expected CAPEX for FY22 = ₹160cr. Of which the company spent 46.7cr in H1. Estimated CAPEX for FY23 = 220cr.
Struggling with capacity constraint, the capacity expansion at Dahej is likely to come by Q4FY22 & Q1FY22. That will increase the capacity significantly . Given the asset turnover of 3x, this is likely to generate growth over the next couple of years.
Also working on several other expansion projects which I have listed below:
Raw material:
Given that China is changing itself, all companies are struggling with raw material supply issues. To take care of the same, Glenmark Lifesciences have also started working on backward integration at their Ankleshwar(Maharashtra) land. This will cater to the top 3-4 molecules of the company and is likely to come on stream Q2FY23, leading to improvement in margins.
As of today, the company has dependence on China for raw materials.
R&D spend:
The company has pumped up its expenditure on R&D. They have spent 2.5% on R&D in H1. R&D includes 213 personnel constituting 13.86% of total permanent employee strength as of 30th Sep’21.
Glenmark Life Sciences Ltd- Q2FY22 Financial Analysis
As mentioned earlier due to capacity constraints, the sales growth lagged. But coming to margins, they continue to remain robust due to value added nature of company's products.
The company has repaid all its debt and is debt free now. That is somewhat visible in Q2FY22 where on a quarter on quarter basis interest expense has went down from ₹21cr to ₹7cr.
Glenmark LifeSciences now has cash equivalent of ₹426cr.
Company also announced a dividend of ₹10.5 this quarter.
Valuation:
The company continues to be cheaply valued at Price/Earning ratio of 22.5x and Price to sales ratio of 4x. Given the EBITDA margin of about 30%+ and PAT margin of 20%+, healthy cash flow, debt free, massive CAPEX planned, it really looks like it is an ignored opportunity.
To add, The demand scenario for the companies product remain robust.
Concall:
You can listen to company's Q2FY22 concall here: Link
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