GlaxoSmithKline Pharmaceuticals Ltd - PINC Result Review

Muted Sales Growth, All time high margins

GSK Pharma's Q2CY10 results were below our expectation with 9% growth in gross sales, 5% lower than our estimates. Other operating income grew by 111% and helped overall revenues to grow by 10%. Gross margin expanded by 209bps and stood at an all time high level. However, higher staff (+13%) and other expenditure (+18%) limited the EBITDA margin expansion to 137bps. Adjusted net income (excluding the exceptional items) grew by 6% and was 5% below our estimates.

We reiterate our 'SELL' recommendation while raise our target price to Rs1,696 from Rs1,649 which is at 22x Sep'11E earnings.

All time high margins

Gross margin improvement of 209bps along with the higher other operating income led the overall EBITDA growth. However this was partially neutralized by higher staff and other expenditures leading to a 137bps expansion in EBITDA margin.

Growth trajectory to remain muted

We believe that revenue contribution from the patented products would be < 5% of overall sales over the next 3 years and margins for the products will be lower than that of the existing business due to the cost of development (done by the parent) being recovered from GSK India. Consequently, even with the launch of a few patented products over the next 3 years, the growth trajectory is unlikely to shift drastically.

VALUATIONS AND RECOMMENDATION

We retain our estimates for GSK Pharma while roll forward our TP to Sep'11 earnings and derive at Rs1,696. Our target price provides 17% downside to the CMP. We maintain our 'SELL' recommendation.

Source : Equity Bulls

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