Glaxo SmithKline Pharma - Target price revision - Results affected by NPPP - Centrum

Rating: Sell; Target Price: Rs2,010; CMP: Rs2,492; Downside: 19.3%

Results affected by NPPP

We maintain Sell rating on Glaxo SmithKline Pharma (GSK) with a revised target price of Rs2,010 (earlier Rs2,130) based on 24xDec'15 EPS of Rs83.7. GSK's results for Q1CY14 were lower than our expectations and were affected by NPPP provisions. Some of GSK's major brands witnessed steep price reduction under NPPP. We expect growth momentum to continue due to price revision of 6.2% for price controlled products and up to 10% for those outside price control in April'14. We have revised our CY14 and CY15 EPS estimates downward by 12% and 9% respectively. Key risks to our assumptions include faster than expected growth of the domestic market and appreciation of rupee against the dollar, which will bring down the cost of imported raw materials.

Revenue to grow faster: GSK reported 4%YoY decline in revenues to Rs6.10bn from Rs6.37bn. Revenues were impacted by NPPP. Some of GSK's major brands saw sharp reduction in price due to NPPP. However, these brands witnessed good volume growth. Meanwhile, GSK launched five new products, Acne-Aid for acne, Avamys for allergic rhinitis, Cardio Check for determining cholesterol levels, Physiogel lotion for the skin and Xgeva for bone cancer. We expect these brands to drive future growth.

EBIDTA margin under pressure: GSK's EBIDTA margin declined by 870bps to 17.6% from 26.3% mainly due to overall increase in costs and lower sales growth. The company's material cost went up by 540bps to 48.3% from 42.9% due to price reduction of its major brands under NPPP. Personnel cost was up by 130bps to 13.7% from 12.4%. Other expenses grew by 210bps to 20.4% from 18.3%. We expect GSK's margin to improve from Q2CY14 onwards due to the price revision of most of its products during April'14.

Net profit to be better: GSK's net profit before EO items declined by 43% YoY to Rs965mn from Rs1,706mn due to sharp reduction in margins, lower interest income and higher tax rate. Its interest income declined by 42%YoY to 449mn from Rs770mn. The company's tax rate went up to 34.9% from 29.1%. We expect improvement in net profit due to margin improvement from Q2CY14 onwards due to price revision of its brands in April'14.

Recommendation and key risks: We expect the company to perform well from Q2CY14 onwards due to price revision and new product introductions. We have revised our EPS estimates for CY14 and CY15 downwards by 12% and 9% respectively. We maintain Sell rating on the scrip with a revised target price of Rs2,010 based on 24x Dec'15 EPS of Rs83.7 with a downside of 19.3% from the CMP due to its rich valuations. Key risks to our assumptions include faster than expected growth of the domestic market and appreciation of rupee against the dollar, which will bring down the cost of imported raw materials.

Source : Equity Bulls

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