Glenmark Pharma's (Glenmark) Q3FY21 performance was largely inline with our estimates supported by India sales and better profitability. Revenue grew 1.9% YoY to Rs27.9bn, EBITDA margin improved 480bps to 20.9%  and adj. PAT increased 25.0% to Rs2.4bn.

 India business grew 11.8% outpacing the industry with contribution from COVID-19 related drugs (although its declining). US business improved 4.4% QoQ as high price erosion in its derma portfolio has stabilised to 5-6%. We believe margin expansion during the quarter was driven by cost savings and we expect these savings to be partially sustainable. Company expects to close either capital raise in ICHNOS Sciences (R&D arm) or out-licensing of a molecule in near term which would be positive trigger.

India outperforms, US improves: India business grew 11.8% YoY vs mid-single digit industry growth. The company is gaining healthy traction on an innovative anti-diabetic product, Remogliflozin and recently launched line extension (Remogliflozin+Vildagliptin). Glenmark's COVID-19 related drugs (Fabiflu) also supported growth in Q3FY21. However, with increasing competition and lower demand, contribution from them is declining. We expect a CAGR of 10.5% over FY20-FY23E in India business. US revenue increased 4.4% QoQ to US$106mn as price erosion in derma products stabilised to 5-6%. We expect a moderate 1.0% CAGR over FY20-FY23E in US revenue driven by new launches. EU and ROW remained flattish largely due to pandemic led lockdown affecting growth.

Margin improving: Gross margin improved 210bps YoY led by higher proportion of India sales and lower R&D expenses (-15.3% YoY, -18.4% QoQ) supported EBITDA margin (ex-forex loss of Rs530mn) which improved 480bps YoY to 20.9%. We believe that the cost saving initiatives are partially sustainable which could keep EBITDA margins stable at ~18-19% over the medium term. We expect EBITDA margin to gradually improve 230bps over FY20-FY23E to 18.3%.

Outlook: We estimate 6.5% revenue and 16.4% PAT CAGRs over FY20-FY23E, respectively, with margin expansion of 230bps. The company has initiated fund raising exercise as well as partnership for its immunology and pain portfolio for ICHNOS Sciences (innovative R&D arm) in the US to make it a self-sufficient segment and is confident of completing it by FY22. This would also help in bringing down leverage which stood at Rs36.4bn as on Dec'20.