GlaxoSmithKline Pharmaceuticals - 1QCY13 Results Update - Motilal Oswal

GSK Pharma 1QCY13 performance was below estimates. Key highlights:

- GSK Pharma's (GLXO) 1QCY13 performance was below estimates. Company reported muted top line growth of 1.5% to INR6.32b (v/s est of 12.8% growth to INR7.03b), EBITDA decline of 16.8% to INR1.63b (v/s est of INR2.28b) and adj PAT decline of 8.1% to INR1.71b (v/s est of INR2.05b).

- Top line growth was impacted by a flat growth in pharma business, which accounts for 95% of overall sales. Company attributed this to supply chain related issues, some of which are expected to get resolved by 2QCY13.

- EBITDA margin was down 5.6% YoY to 25.8%, below our est of 32.5%. We believe that fixed overheads, despite low top line growth, have impacted operational performance. Adj PAT decline is less than EBITDA due to higherthan-expected other income and lower tax expense.

We believe that factors impacting this quarter's performance would be temporary in nature and expect the company's profitability to normalize by end-CY13E. However, we lower CY13E/14E EPS estimates by 10%/3% to reflect the impact of slowdown expected over the next couple of quarters. We believe GLXO is one of the best plays on IPR regime in India, with aggressive plans to launch new products in high growth lifestyle segments. These launches will bring long term benefits. GLXO deserves premium valuations due to strong parentage (giving access to large product pipeline), brand building ability and likely positioning in post patent era. It is one of the few companies with an ability to drive reasonable growth without any major capital requirement, leading to high RoCE of 45-50%. Our current estimates exclude potential adverse impact of the proposed New Pharma Pricing Policy that is pending implementation. However, we believe that the policy will adversely impact MNCs like GLXO and hence we expect a downgrade in our estimates, post the policy's implementation. While we have not included the impact of the brand-swap deal with GSK Consumer, we believe it will help GLXO drive its top line growth and profitability above the guidance given earlier. However, pending further clarity on the financial benefit from this deal, we increase the target multiple to 27x CY14E to arrive at a target price of INR2,655. At CMP, the stock is valued at 29.3x CY13E and 24.2x CY14E EPS. Maintain Buy.

Source : Equity Bulls

Keywords