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GlaxoSmithkline Pharmaceuticals (GLXO)
Pharmaceuticals
Sales growth continues to be weak. PAT was 6% below our estimate marked by (1)
poor sales growth of 13% on low base (9% growth in 2Q2011) and (2) lower margin,
down yoy and qoq to 35.5%. We cut our 2011E sales growth to 14% from 15.5%
earlier, lower than guidance at AGM and reduce our 2011-12E EPS by 3%. Increase in
costs on account of ramp-up in field force combined with poor sales growth is likely to
result in slightly lower operating margin in 2011E. High dividend payout ratio is the sole
justification to hold this stock at these levels, maintain REDUCE with PT at Rs2,220
(from Rs2,300) (25X core EPS).
Sales at Rs5.6 bn grow 13% yoy, lower than our estimate of 15.5%
Although sales growth picked up qoq to 13% in 2Q2011 from 11% in 1Q2011, we remain
unimpressed as (1) this growth was on a low base of last year—9% growth in 2Q2010, (2) though
pharma sales growth increased qoq to 14% in 2Q2011 versus 12.4% in 1Q2011, there is no pickup
in growth versus 14% pharma sales growth reported in 2010 and (3) YTD sales growth at 12%
is lower than 15% growth talked about at the AGM.
PAT excluding exceptional cost was at Rs1.5 bn, 6% lower than our estimate
EBITDA margin declined 60 bps qoq and 300 bps yoy to 35.5%, 180 bps lower than our estimate
due to (1) poor sales growth and (2) sharp increase in staff cost and other expenses at 17-22%.
Staff costs peak in 2Q due to annual bonuses as expected and we expect reduction in same in
2H2011E. Gross margin was down 100 bps yoy to 64%.
We reduce our 2011-12E EPS by 3%
At its AGM, Glaxo guided for 15% sales growth in 2011E and expects profit to grow in line with
sales growth. We cut our 2011E sales growth assumption to 14% from 15.5% earlier (12%
reported in 1H2011) and reduce our margin assumption from flat margin to 50 bps margin decline
in 2011E as increase in costs on account of ramp-up in field force combined with poor sales
growth is likely to result in lower operating margin in 2011E. Glaxo increased its sales force by 550
in 1Q2011 and intends to add another 200 in taking the total to 3,600 by end-2011E. This
expansion is part of its rural marketing initiative ‘Reach’.
We maintain REDUCE due to stretched valuations (stock ex cash/share trading at 24X 2012E EPS)
We reduce PT to Rs2,220— (1) business value/share of Rs1,920 (25X 2012E core 2012E EPS) and
(2) cash/share of Rs300. Plans for use of surplus cash for brand acquisition remain uncertain,
although dividend payout increased to 60% (from 50%) in 2010.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GlaxoSmithkline Pharmaceuticals (GLXO)
Pharmaceuticals
Sales growth continues to be weak. PAT was 6% below our estimate marked by (1)
poor sales growth of 13% on low base (9% growth in 2Q2011) and (2) lower margin,
down yoy and qoq to 35.5%. We cut our 2011E sales growth to 14% from 15.5%
earlier, lower than guidance at AGM and reduce our 2011-12E EPS by 3%. Increase in
costs on account of ramp-up in field force combined with poor sales growth is likely to
result in slightly lower operating margin in 2011E. High dividend payout ratio is the sole
justification to hold this stock at these levels, maintain REDUCE with PT at Rs2,220
(from Rs2,300) (25X core EPS).
Sales at Rs5.6 bn grow 13% yoy, lower than our estimate of 15.5%
Although sales growth picked up qoq to 13% in 2Q2011 from 11% in 1Q2011, we remain
unimpressed as (1) this growth was on a low base of last year—9% growth in 2Q2010, (2) though
pharma sales growth increased qoq to 14% in 2Q2011 versus 12.4% in 1Q2011, there is no pickup
in growth versus 14% pharma sales growth reported in 2010 and (3) YTD sales growth at 12%
is lower than 15% growth talked about at the AGM.
PAT excluding exceptional cost was at Rs1.5 bn, 6% lower than our estimate
EBITDA margin declined 60 bps qoq and 300 bps yoy to 35.5%, 180 bps lower than our estimate
due to (1) poor sales growth and (2) sharp increase in staff cost and other expenses at 17-22%.
Staff costs peak in 2Q due to annual bonuses as expected and we expect reduction in same in
2H2011E. Gross margin was down 100 bps yoy to 64%.
We reduce our 2011-12E EPS by 3%
At its AGM, Glaxo guided for 15% sales growth in 2011E and expects profit to grow in line with
sales growth. We cut our 2011E sales growth assumption to 14% from 15.5% earlier (12%
reported in 1H2011) and reduce our margin assumption from flat margin to 50 bps margin decline
in 2011E as increase in costs on account of ramp-up in field force combined with poor sales
growth is likely to result in lower operating margin in 2011E. Glaxo increased its sales force by 550
in 1Q2011 and intends to add another 200 in taking the total to 3,600 by end-2011E. This
expansion is part of its rural marketing initiative ‘Reach’.
We maintain REDUCE due to stretched valuations (stock ex cash/share trading at 24X 2012E EPS)
We reduce PT to Rs2,220— (1) business value/share of Rs1,920 (25X 2012E core 2012E EPS) and
(2) cash/share of Rs300. Plans for use of surplus cash for brand acquisition remain uncertain,
although dividend payout increased to 60% (from 50%) in 2010.
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