After a scare in the first quarter, Glenmark Pharmaceuticals Ltd has been recuperating quite nicely. The company delivered a strong quarterly performance ahead of the Street’s expectations. Growth in two of its key markets, India and the US, pushed revenue and operating metrics higher. Shares of Glenmark, which were hovering at their 52-week lows, pulled back sharply and gained 22% on Monday.

Glenmark’s domestic business grew by about 15% year-on-year in Q2 FY20, which is decent. The firm gained market share in some key therapies domestically. Besides, the US business grew marginally from a year ago, but quarter-on-quarter growth stood at 14%. This beats the Street’s estimates by 12-13%.


Given that the US market is facing high competitive pricing pressure, the recovery is a positive sign. Further, the commentary from the management has been cautiously optimistic, with growth rates expected to be in mid-single digits in the second half. The company is expecting approval for two products in the US, which will further aid growth rates. Additionally, the rest of the world business is also gaining momentum.

As a result of the improvement in revenue growth, Ebitda (earnings before interest, tax, depreciation and amortization) margins have expanded. In fact, Ebitda margins of 16% this quarter is about 200 basis points higher than analysts’ expectation of about 14%. This is despite higher expenses due to rising staff costs.

Net debt, which increased marginally in Q2, however still remains a concern. “However, we are yet to see any net debt reduction, net debt increased by US$10mn in 1HFY20, from the core business (capital expenditures at US$ 100 mn+ and R&D at US$185 mn—both continue to be high). The management expects debt reduction to be achieved from the divestment of non-core assets where they expect some closure of deal over the next two quarters," said Credit Suisse India in a note to clients.

The company has hived off its innovative research and development division into a separate firm, Ichnos Sciences. Glenmark is looking for equity funds for this business. “Operationally, the company has done well in the second quarter. But fund-raising has become critical because it needs capital to support research and also to cut back on debt. If that happens by the year-end, it will be a major improvement," said Bhavesh Gandhi, senior analyst (institutional equities) at Yes Securities Ltd.

Analysts expect Glenmark’s net debt to shrink by about $3 billion by the end of this year, which will reduce its debt-equity ratio. Meanwhile, the stock’s recovery has come on the back of a steep fall over the past year. Further recovery will depend on how quickly Glenmark can get the required capital.

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