Results affected by manufacturing constraints Glaxo SK Pharma’s (GSK) ::: Centrum

Results affected by manufacturing constraints
Glaxo SK Pharma’s (GSK) results for Q3CY12 were below our expectations.
The company reported 10%YoY growth in revenues, 70bps improvement in
EBIDTA margin and 12%YoY growth in net profit. The growth was driven by
vaccines and specialties segments. However, capacity constraints at its
Nashik facility and one of the suppliers of sterile products affected the results.
GSK is a debt-free company with cash/share of Rs201. We expect the growth
momentum to be maintained from new products introduction. We have
lowered our CY12 and CY13 estimates by 5% and 3% respectively. We have a
Buy rating for the scrip with a revised target price of Rs2,393 (based on 24x
CY13E EPS of Rs99.7).
Moderate growth in core business: GSK reported 10%YoY growth in
revenues from Rs6.15bn to Rs6.76bn. The pharma business grew by 11.0%
during the quarter. The company’s vaccines and specialties segments had
good growth. New products introduction is likely to drive future growth.
Margin improved: GSK’s EBIDTA margin improved by 70bps YoY from 29.8%
to 30.5% due to the reduction in other expenses. The company’s material cost
increased by 260bps from 39.5% to 42.1% of revenues due to the rise in
imported raw material cost with the depreciating rupee. GSK’s personnel cost
increased by 30bps from 10.8% to 11.1%. Other expenses declined by 370bps
from 20.0% to 16.3% of revenues due to rationalization measures

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Manufacturing constraints affected sales: GSK’s sales during the quarter
were impacted by constraints of sterile manufacturing at one of the suppliers
end and constraints at its Nashik facility. The company has resolved the said
constraint and is likely to show good growth from Q4CY12 onwards.
Major brands growing well: As per IMS MAT-September’12 data, GSK’s five
major brands reported good growth namely: Augmentin 17.9%, Calpol 22.5%,
Zinetac 18.5%, Betnovate-N 13.9% and Eltroxin 19.5%. These brands are likely
to drive future growth.
New product introduction: GSK launched the following new products during
the quarter: Zimivir for herpes and Ictacetam for epilepsy. These products are
likely to become future growth drivers.
Valuations: We expect GSK to benefit from growth in domestic market and
introduction of new products. We have lowered our EPS estimates for CY12
and CY13 by 5% and 3% respectively. At the CMP of Rs2,006, the stock trades
at 24.0x CY12 EPS of Rs83.6 and 20.1x CY13E EPS of Rs99.7. We have a Buy
rating for the scrip with target price of Rs2,393 (based on 24x CY13E EPS of
Rs99.7) with 19.3% upside over CMP.