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GlaxoSmithkline Pharmaceuticals (GLXO)
Pharmaceuticals
Shockingly poor results. PAT was 20% below our estimate marked by (1) poor sales
growth of 4% with core pharma growth of 6.5%, lowest in the past 2 years, (2) severe
margin erosion with EBITDA margin at 30% due to poor sales growth, low gross
margin and high cost base, and (3) if not for higher interest income versus our
estimates, PAT miss would have been higher. We revise our 2012E EPS down by 6%
and expect sales growth at 12% (YTD sales growth of 9.5%) in 2012E with margin at
34% (YTD margin at 33.8%). Besides high dividend payout (60% of PAT), we can’t
think of any reason to hold this stock at these levels. We downgrade to SELL (was
REDUCE) with PT at Rs1,930 (from Rs2,220), 23X core EPS (25X earlier).
Sales at Rs6 bn, grew 4% yoy, lower than our estimate and 2Q2011’s 13%
Sales growth at 4% dropped to lowest levels in the past several quarters, lower than our estimate
and 2Q2011’s sales growth of 13%. According to Glaxo, while vaccines (10-13% of sales) and
specialty segments reported double-digit growth, the anti-infectives and other mass marker
segments such as gastrointestinal which account for majority of Glaxo’s sales grew poorly due to
overall lower growth of the market and higher competitive intensity. Glaxo reported 6.5% pharma
sales growth, down from 12-14% in 1Q-2Q2011. YTD sales growth is 9.5%, lower than the 15%
growth talked about at its 2011 AGM.
PAT at Rs1.46 bn, 20% lower than our estimates due to poor sales growth and low margin
EBITDA margin declined to 30%, lowest in the past several quarters due to (1) poor sales growth,
(2) low gross margin, gross margin dipped to 60%, down 3% yoy and qoq, and (3) high cost base
on account of—(a) other expenses comprising selling, promotional spend shot up 34% qoq and
24% yoy whereas (b) staff costs were up 16% yoy due to ramp-up in field force although down
qoq. Glaxo increased its sales force by 550 in 1Q2011 and has added another 200 taking the total
to 3,600. This expansion is part of its rural marketing initiative ’Reach’.
We reduce our 2011-12E EPS by 3-6%
At its AGM, Glaxo guided for 15% sales growth in 2011E and expected profit to grow in line with
sales growth. We cut our 2011E sales growth assumption to 10.6% from 13.8% earlier (9.5% in
9M2011) and retain our 2012E assumption at 12.2%. We reduce our 2011E margin by 100 bps to
34% (33.8% margin in 9M2011) and maintain flat margin in 2012E as increase in sales force in
2011E presents limited scope for margin expansion.
Downgrade to SELL (was REDUCE); PT at Rs1,930 (from Rs2,220), 23X core EPS (was 25X earlier)
We reduce PT to Rs1,930— (1) business value/share of Rs1,660 (23X core 2012E EPS) and (2)
cash/share of Rs270.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GlaxoSmithkline Pharmaceuticals (GLXO)
Pharmaceuticals
Shockingly poor results. PAT was 20% below our estimate marked by (1) poor sales
growth of 4% with core pharma growth of 6.5%, lowest in the past 2 years, (2) severe
margin erosion with EBITDA margin at 30% due to poor sales growth, low gross
margin and high cost base, and (3) if not for higher interest income versus our
estimates, PAT miss would have been higher. We revise our 2012E EPS down by 6%
and expect sales growth at 12% (YTD sales growth of 9.5%) in 2012E with margin at
34% (YTD margin at 33.8%). Besides high dividend payout (60% of PAT), we can’t
think of any reason to hold this stock at these levels. We downgrade to SELL (was
REDUCE) with PT at Rs1,930 (from Rs2,220), 23X core EPS (25X earlier).
Sales at Rs6 bn, grew 4% yoy, lower than our estimate and 2Q2011’s 13%
Sales growth at 4% dropped to lowest levels in the past several quarters, lower than our estimate
and 2Q2011’s sales growth of 13%. According to Glaxo, while vaccines (10-13% of sales) and
specialty segments reported double-digit growth, the anti-infectives and other mass marker
segments such as gastrointestinal which account for majority of Glaxo’s sales grew poorly due to
overall lower growth of the market and higher competitive intensity. Glaxo reported 6.5% pharma
sales growth, down from 12-14% in 1Q-2Q2011. YTD sales growth is 9.5%, lower than the 15%
growth talked about at its 2011 AGM.
PAT at Rs1.46 bn, 20% lower than our estimates due to poor sales growth and low margin
EBITDA margin declined to 30%, lowest in the past several quarters due to (1) poor sales growth,
(2) low gross margin, gross margin dipped to 60%, down 3% yoy and qoq, and (3) high cost base
on account of—(a) other expenses comprising selling, promotional spend shot up 34% qoq and
24% yoy whereas (b) staff costs were up 16% yoy due to ramp-up in field force although down
qoq. Glaxo increased its sales force by 550 in 1Q2011 and has added another 200 taking the total
to 3,600. This expansion is part of its rural marketing initiative ’Reach’.
We reduce our 2011-12E EPS by 3-6%
At its AGM, Glaxo guided for 15% sales growth in 2011E and expected profit to grow in line with
sales growth. We cut our 2011E sales growth assumption to 10.6% from 13.8% earlier (9.5% in
9M2011) and retain our 2012E assumption at 12.2%. We reduce our 2011E margin by 100 bps to
34% (33.8% margin in 9M2011) and maintain flat margin in 2012E as increase in sales force in
2011E presents limited scope for margin expansion.
Downgrade to SELL (was REDUCE); PT at Rs1,930 (from Rs2,220), 23X core EPS (was 25X earlier)
We reduce PT to Rs1,930— (1) business value/share of Rs1,660 (23X core 2012E EPS) and (2)
cash/share of Rs270.
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