Glaxo SmithKline Pharma - Higher material cost affects results - Centrum

Glaxo SK Pharma's (GSK) results for Q4CY12 were below our expectations. The company reported 15%YoY growth in revenues, 170bps decline in EBIDTA margin and 7%YoY growth in net profit before EO items. The growth was driven by vaccines, specialty segments and new products. GSK is a debt-free company with cash/share of Rs244. We expect the growth momentum to be maintained from new products, vaccines and specialty products. We have lowered our CY13 and CY14 estimates by 2% each. We have a Buy rating for the scrip with a revised target price of Rs2,341 (based on 24x CY13E EPS of Rs97.6).

- Good growth in core business: GSK reported 15%YoY growth in revenues from Rs5.78bn to Rs6.63bn. The core pharma business grew by 16% during the quarter. GSK's vaccines and specialty segments had good growth. The vaccines business grew by 34% and contributed 13% during the year. New products introduced during CY12 are likely to drive future growth.

- Rise in material cost affects margin: GSK's EBIDTA margin declined by 170bps YoY from 31.5% to 29.8% due to the increase in material cost. The company's material cost increased by 190bps from 40.4% to 42.3% of revenues due to the rise in imported raw material cost with the depreciating rupee. GSK's personnel cost declined by 60bps from 12.2% to 11.6% due to the closure of Thane manufacturing facility. Other expenses increased by 40bps from 15.9% to 16.3% of revenues due to new product launch expenses.

- Major brands growing well: As per IMS MAT-December'12 data, GSK's five major brands reported higher than the market growth of 11.1% namely: Augmentin 15.5%, Calpol 18.8%, Zinetac 18.6%, Eltroxin 25.3% and Neosporin 13.2%. These brands are likely to drive future growth.

- New products introduced: GSK launched the following branded generic products during the year: Zimivir for herpes, Ictacetam for epilepsy, IVfer for iron deficiency and Uriscostat for gout. GSK introduced the following products in the specialty segment: Altargo in derma, Volibris in CVS, Hycamtin for cancer and Lamictal in CNS segment. The company also introduced Seretide and Evohaler metered dose inhalers (MDI) for asthma. These products are likely to become future growth drivers.

- Valuations: We expect GSK to benefit from growth in domestic market and introduction of new products. We have lowered our EPS estimates for CY13 and CY14 by 2% each. At the CMP of Rs2,097, the stock trades at 21.5x CY13E EPS of Rs97.6 and 18.3x CY14E EPS of Rs114.4. We have a Buy rating for the scrip with a revised target price of Rs2,341 (based on 24x CY13E EPS of Rs97.6) with 11.7% upside over CMP.

Source : Equity Bulls

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