GSK Pharma - Downgrade to Sell on margin decline - Centrum

Glaxo SK Pharma's (GSK) results for Q2CY13 were below our expectations. The company reported a decline of 3%YoY in revenues, 1,320bps in EBIDTA margin and 45%YoY in net profit. The company's performance suffered due to supply constraints and trade related issues. GSK revenues will be impacted by ~5% of annualised sales due to price reduction under NPPP. About 30% of GSK's products by value will be under price control compared to ~24% earlier. We have reduced our EPS estimates for CY13 and CY14 by 23% and 20% respectively. We have revised our rating to Sell from Buy due to expected decline in revenues and revised target price downwards to Rs2,042 from Rs2,364(based on 24x CY14 EPS of Rs85.1).

Revenue declines: GSK's revenues declined by 3%YoY to Rs6.45bn from Rs6.62bn due to supply constraints and trade issues. Sales during the quarter were affected by the three-week strike by traders in Maharashtra leading to lower off-take. Moreover, chemists maintained lower stocks due to the expected decline in prices for drugs going under price control as per NPPP.

Sharp drop in margin: GSK's EBIDTA margin for Q2CY13 dropped by 1,320bps to 18.9% from 32.1% mainly due to overall increase in expenses. Its material cost grew by 490bps to 45.8% from 40.9% of revenues due to the increase in imported material cost. Personnel cost increased by 350bps to 15.4% from 11.9% due to annual increments. Other expenses were up by 490bps to 19.9% from 15.0% of revenues.

Major brands show slow growth: As per AIOCD AWCS data-MAT June'13, GSK grew by 4.0% against the industry's 9.8%. The company's four major brands grew faster than the market. These were, Augmentin 10.0%, Calpol 13.0%, Eltroxin 17.2% and Betnovate-N 13.5%. However, Ceftum and Betnesol reported decline in revenues. Revenues from Augmentin, Calpol and Eltroxin will decline as they are now under price control.

Major risks: GSK faces major risks from NPPP as four of its major brands with revenues of Rs7.1bn have gone under price control. The company expects a revenue loss of ~5% on annualised revenues. About 30% of GSK's products by value are now under price control compared to ~24% earlier. GSK's import cost will go up due to depreciation of rupee against the dollar. Its revenues and profits will get impacted by supply constraints. The company faces a threat from the trade due to strikes and boycott of its brands.

Valuations: At the CMP of Rs2,332 the stock trades at 33.4x CY13E EPS of Rs69.7 and 27.4x CY14E EPS of Rs85.1. We have changed our rating to Sell from Hold and revised our target price to Rs 2,042 from Rs2,364 due to the expectation of sharp drop in EBIDTA margin and net profit for CY13 and CY14. Our target price is based on 24x CY14E EPS of Rs85.1 with a downside of 12.4% over CMP.

Source : Equity Bulls

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