Macquarie Research:: GSK Pharma- In-line results; remains domestic play

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GSK Pharma
In-line results; remains domestic play
Event
 CY10 results in line with our estimates: GSK reported CY10 results,
with net sales of Rs 21.5b (up 12.8% yoy) and PAT of Rs5.8b (up 15%
yoy) on back of growth in all segments. EBITDA margin came at 36.2%.
We maintain our Neutral rating and TP of Rs2,210.

Impact
 Growth across all segments: Mass markets and mass speciality
businesses registered good growth, driven by launch of branded generics,
increasing extension of rural coverage and focussed efforts in the hospital
segment. In 4QCY10, Net Sales grew by 10.3% YoY to Rs 5b and PAT
grew by 6% YoY to Rs1.2b. The core Pharmaceuticals business grew by
14.3% YoY in CY10 and 11.4% for 4QCY10.
 Vaccines and Dermatologicals leading the way: According to the
management, new launches in vaccines registered good growth and have
attained market leadership. Vaccines currently contribute ~ 13% of the top
line. The Dermatology business registered robust growth rates, with the
Stiefel range of products making visible contributions. GSK has a broader
product basket covering ~90% of the Indian derma market (~50% before
the Stiefel acquisition).
 Patented launches: The successful launch of GSK’s patented oncology
product, Tykerb, has bolstered the company’s oncology franchise.  Also
during CY10, GSK launched Mycamine, an injectible antifungal in licensed
from Astellas. However, upside from patented products will be limited over
the near term due to a slower ramp-up.
 Leeway to pursue strategic alternatives: With ~Rs16b in net cash and a
negative WC, GSK has one of the strongest balance sheets in the sector.
This provides much requisite leeway to pursue strategic
alternatives. Company remains open to acquisition of assets at
reasonable valuation that would help strengthen the India formulation
business. GSK recommends a healthy dividend of Rs40/sh (Rs30/Sh in
CY09 implying ~Rs3.9b of cash outflow).
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs2,210.00 based on a PER methodology.
 Catalyst: Acquisition of value-accretive company
Action and recommendation
 Although we believe in the long-term fundamentals of GSK, at current
price, positives are priced in, in our view. We value GSK at a PER of 24x
CY12E PE, a 20% premium to the sector average PER, given stable
nature of GSK's earnings profile, high-return ratios, free cash-flow
generation and healthy dividend yield support.