GlaxoSmithKline Pharmaceuticals Q1CY13 First Cut: Dismal revenue growth due to supply issues - Karvy

(GLXO IN Equity; SELL; MktCap: US$3804mn; CMP: Rs2,380; TP: Rs2,058; 14% Downside)

- In Q1CY13, GSK's revenues increased 1.5% YoY to Rs.6321mn as against our expectations of Rs 6850mn. The low revenue growth has been on account of supply chain issues which impacted revenues to the tune of Rs 500mn. There was also a negative impact on account of the vaccines and IV supplies during the quarter.

- The Company's EBITDA stood at 26.3% (lower than our expectation of 31.4%) in Q1CY13 lower than 32.2% reported in Q1CY12. Cost of material to sales ratio has increased marginally to 43.2% (our expectation 42.7%) compared to 42.1% in Q1CY12was on account of lower gross margins as sales of high margin products were impacted. Increase in staff cost was on account of increments which are given during the first quarter and addition of 60 people at the Nashik facility. Other expenses have also increased by 250bps to 18.5% YoY. This in marginally higher than the preceeding quarter in actual numbers. The Company's net profit stood at Rs. 1706 mn in Q1CY13, as against our estimate of Rs.1,861 mn (decrease of 8.1% YoY and increase of 7.8% QoQ).

- Outlook & Valuation: The current supply issues with two contract manufacturing sites will get resolved in the April -June quarter and will see better margins. However, the company has no visibility on supply constraints from overseas companies of GSK Plc. for supply of vaccines and IV supplies. We have factored a Rs 2.1 bn policy impact for H2 CY13 and H1 CY14. The company's Thane facility has got the necessary clearances and can be sold. The company is hopeful of outperforming the industry growth. Currently, we have a SELL rating on the stock with a price target of Rs 2,058 based on 25x CY 2014E (EPS Rs 82.3).

Source : Equity Bulls

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