GlaxoSmithKline Pharma – 3QCY2010 Result Update Angel Broking

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  GlaxoSmithKline Pharma – 3QCY2010 Result Update

Angel Broking recommends a Neutral on GlaxoSmithKline Pharma.

GlaxoSmithKline Pharma (Glaxo) reported in-line top-line for 3QCY2010. The

higher-than-expected profit growth came on the back of higher interest income.

During the quarter, Glaxo addressed supply constraints in the high-margin

vaccine segment, which grew 34% yoy and contributed 10% to sales. We have

rolled forward to CY2012 and recommend Neutral on the stock. Key upside risk

to our call includes any future acquisitions given high cash on the books.

Revenue in line, up 14%: Glaxo reported net sales of `582cr (`512cr), up 13.7%

yoy driven by the mass markets, mass specialities and specialities businesses. The

high-margin vaccine segment (mainly Rotarix and Cervarix) grew 34% during the

quarter and contributed 10% to sales. The company reported gross margin of

63.0% (64.9%), down by 190bp yoy on back of higher raw-material cost.

However, Glaxo reported OPM of 35.9% (36.9%), which was ahead of our

estimates due to lower employee expenses. Employee expenses for the quarter

increased by a mere 1.9% yoy to `57cr (`56cr) and partially offset the contraction

in gross margins. Net profit came in at `158cr (`141cr), up 11.8% yoy on the

back of higher interest income.

Outlook and Valuation: We expect net sales to post 13.9% CAGR to `2,783cr

and EPS to register 14.1% CAGR to `85.2 over CY2010–12. At current levels, the

stock is trading at 30.5x and 26.9x CY2011E and CY2012E EPS, respectively. We

have rolled over to CY2012 and recommend Neutral on the stock. Key upside risk

to our call includes future acquisitions given high cash in the books.

Recommendation Rationale

Renewed focus on Indian market: Glaxo is among the top-5 players in the Indian

market with a market share of ~5%. Post the IPR regime, the company has

renewed its focus on the domestic market with the launch of five patented products

(mainly Tykerb and Rotarix) in the last two years.

 In CY2010, the company plans to

launch dermatology products post the Stiefel Labs acquisition by GSK plc, 3-4

products in the oncology space and two vaccines. New product launches since

CY2007 have accounted for 1/3rd of the 13% yoy top-line growth registered by

the company in CY2009. Further, in line with the market dynamics, Glaxo has

launched patented products at discounts in India compared to other markets. To

achieve penetration-led growth, the company plans to increase its field force by

200 MRs in CY2010 to 2,800. For CY2010, the company expects top-line to grow

12% yoy with operating margins between 33-35%.

Outlook and Valuation: Glaxo has a strong balance sheet with cash of `2,000cr

(~10% of market cap), which could be used for future acquisitions or higher

dividend payouts. We expect net sales to post 13.9% CAGR to `2,783cr and EPS to

register 14.1% CAGR to `85.2 over CY2010–12. At current levels, the stock is

trading at 30.5x and 26.9x CY2011E and CY2012E earnings, respectively. We

have rolled over to CY2012 and recommend Neutral on the stock. Key upside risk

to our call includes any future acquisitions given the high cash on books.