GSK India In-line results; Risk-reward unattractive:: BofA ML

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GSK India
In-line results; Risk-reward
unattractive
􀂄 In-line 3Q; Retain Underperform on expensive valuations
GSK’s 3Q profits at Rs1.6bn grew by 12% YoY (13% QoQ) driven by a weak
topline growth of 14% YoY in a seasonally strong quarter (against ~16% industry
average). Sales at Rs5.8bn was unexciting, however margins (down 200bps
QoQ) at 34.5% fell short of expectations (35%), and well below our CY11 estimate
of 35.7%. We see downside risk to our estimates even as we believe current
valuations are demanding, noting modest 15% earnings growth over CY10-12E.
Sales growth lag industry average
GSK’s weak topline growth of 14% during a seasonally strong 3Q was well behind
industry average of 16-18%. While GSK maintained its market share, we believe
1/4th of growth (3-4%) was attributed to vaccines portfolio (11% of sales). Growth
for the rest of portfolio could be below 11%, given 75%+ concentration in acute
therapy segments, with 26% of total portfolio falling under price control (DPCO).

Modest organic growth outlook may face hiccups
We forecast GSK’s sales to grow at 16% CAGR over CY10-12E (mgmt guidance
of 12%) to be driven by new launches and power brands. GSK got approval for
Revolade (eltrombopag, low-platelet treatment) & Votrient (pazopanib, renal cell
carcinoma) in 3Q, which would aid growth going forward. However, we believe
patented products from the parent’s (GSK Plc) stable to account for less than 10%
of sales while risk from a generic competition may dampen growth plans.
Premium valuation factors strong cash position of Rs200/sh
GSK is trading at 32x CY10E & 28.2x CY11E EPS, implying steep 20-25%
premium to large cap pharma peers & at upper-end of its historical P/E bands.
However, given modest earnings growth of 15% & limited upside triggers, we find
current valuations leave little room for error. Strong cash position of Rs200/sh
(Rs17bn) may be utilized for prospective acquisitions to strengthen existing
portfolio, raising expectations. Reiterate Underperform with PO of Rs1765/sh.