GlaxoSmithKline Pharmaceuticals (GLXO IN; Mkt Cap USD3.7b, CMP Rs2,057, Buy)
GSK Pharma's 2QCY10 results were in-line with our estimates.
Key highlights
- GSK Pharma's net sales for 2QCY10 grew 9% YoY to Rs4.98b (v/s our estimate of Rs5.2b) while adjusted PAT grew 6% YoY to Rs1.4b (v/s our estimate of Rs1.46b). Supply constraints resulted in lower vaccine sales, which in turn impacted topline growth. The management has indicated that the supply of vaccines has begun improving towards the end of June 2010. Domestic pharmaceutical revenues grew 12% YoY while overall sales (including exports) grew 9% YoY.
- EBITDA grew 11.5% YoY to Rs1.82b (v/s our estimate of Rs1.86b) while EBITDA margin expanded 90bp YoY to 36.5% (v/s our estimate of 36%). Adjusted PAT grew 6% YoY to Rs1.4b (v/s our estimate of Rs1.46b) primarily on account of lower than estimated sales and lower other income. Reported PAT was lower at Rs1.3b due to extraordinary expenses of Rs106m pertaining to provision made on account of revised gratuity limits and actuarial charges on post-retirement benefits.
- GSK's topline growth is gradually improving; we expect growth of 12-14% for the next two years. Given the high profitability of operations, we expect this growth to lead to sustainable double-digit earnings growth and RoE of ~30%. Growth is likely to be funded through miniscule capex (Rs400m/year) and negative net working capital.
- The stock deserves premium valuations due to strong parentage (giving access to large product pipeline), brand-building ability and likely positioning in post patent era. Based on lower than estimated 2QCY10 results, we have downgraded our EPS estimates. We now estimate EPS at Rs68 (up 14.2%) for CY10 and Rs78.2 (up 15%) for CY11. The stock trades at 30.2x CY10E and 26.3x CY11E earnings. Maintain Buy.