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Glaxo Smithkline Pharmaceuticals -------------------------------- Maintain UNDERPERFORM
High quality but muted growth
● We assume coverage of Glaxo with an UNDERPERFORM rating
and a target price of Rs1,940 (versus Rs1,800 earlier).
● We like Glaxo’s business model as it is a pure play in the Indian
market, has an asset-light model with most costs being variable,
no R&D risks due to parent-supported product pipeline, low
working capital, professional management, and one of the highest
margins in the industry. However, the opportunities to introduce
new products are few. So, we expect the non-vaccine portfolio to
continue to lag the industry average growth, while high growth on
vaccines is not good for margins as vaccines are margin-dilutive.
● Glaxo typically releases its annual guidance at the end of the
calendar year results. We expect CY11 sales growth of 13% and
EBITDA margin of 35%. If Glaxo guides higher than our
assumption, our estimates have upside.
● Glaxo’s low-risk business model commands a higher multiple. So,
we value it at a 20% premium to the sector average at 25x CY11E
or Rs1,940/share.
Glaxo’s non-vaccine portfolio should lag industry growth
Glaxo’s sales growth has broadly lagged the industry average;
however, strong vaccine sales in CY09 and CY10 helped it come
closer to the overall market growth (Figures 1 and 2). The company
suggests that margins on vaccines are less than consolidated margins
(Figure 4). So, as vaccines become a meaningful contribution to
sales, margins should get affected.
We value Glaxo at a 20% premium to the sector, given its low-risk
business model. However, its below-market growth implies that
earnings growth would remain muted. As contribution from the nonurban markets ramps up for the industry, the difference in growth rate between Glaxo and the market may widen. We maintain an
UNDERPERFORM
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Glaxo Smithkline Pharmaceuticals -------------------------------- Maintain UNDERPERFORM
High quality but muted growth
● We assume coverage of Glaxo with an UNDERPERFORM rating
and a target price of Rs1,940 (versus Rs1,800 earlier).
● We like Glaxo’s business model as it is a pure play in the Indian
market, has an asset-light model with most costs being variable,
no R&D risks due to parent-supported product pipeline, low
working capital, professional management, and one of the highest
margins in the industry. However, the opportunities to introduce
new products are few. So, we expect the non-vaccine portfolio to
continue to lag the industry average growth, while high growth on
vaccines is not good for margins as vaccines are margin-dilutive.
● Glaxo typically releases its annual guidance at the end of the
calendar year results. We expect CY11 sales growth of 13% and
EBITDA margin of 35%. If Glaxo guides higher than our
assumption, our estimates have upside.
● Glaxo’s low-risk business model commands a higher multiple. So,
we value it at a 20% premium to the sector average at 25x CY11E
or Rs1,940/share.
Glaxo’s non-vaccine portfolio should lag industry growth
Glaxo’s sales growth has broadly lagged the industry average;
however, strong vaccine sales in CY09 and CY10 helped it come
closer to the overall market growth (Figures 1 and 2). The company
suggests that margins on vaccines are less than consolidated margins
(Figure 4). So, as vaccines become a meaningful contribution to
sales, margins should get affected.
We value Glaxo at a 20% premium to the sector, given its low-risk
business model. However, its below-market growth implies that
earnings growth would remain muted. As contribution from the nonurban markets ramps up for the industry, the difference in growth rate between Glaxo and the market may widen. We maintain an
UNDERPERFORM
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