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GlaxoSmithKline Pharmaceuticals Ltd
Growth back on track but premium valuations limit upside
GlaxoSmithKline Pharma’s (GLXO) Q3CY10 numbers were in line with our
estimates. The company managed to ease supply constraints in its vaccine
business which lifted the overall topline growth during the quarter. We believe
GLXO remains perfectly placed in the Indian pharmaceuticals market and can
capitalise on the domestic formulations growth story by leveraging on its niche
portfolio. Further, product launches in the dermatological segment (through the
recently acquired Stiefel Laboratories) will drive a strong performance going
ahead. While we believe GLXO’s new growth trajectory is sustainable, its near
all-time high valuations factor in most of the positives—hence our HOLD
rating. Rolling six months forward to Sept ’11, we have a revised target price of
Rs 2,160.
Growth back on track: During Q3CY10, GLXO’s net sales increased 14% YoY
driven by growth in the vaccines, specialities and mass market businesses.
Growth in the last quarter was impacted due to supply constraints in the vaccines
business; however, with supply constraints now easing, the company is back on
track. We believe this would help spur topline growth going forward. Also, we
believe that the launch of Stiefel range of products (from GSK Plc’s recently
acquired Stiefel Laboratories) in the dermatology segment would contribute
meaningfully to the topline going ahead.
Margins disappoint though: During Q3CY10, GLXO reported an EBITDA of
Rs 2.2bn (up 11% YoY), in line with our estimate. An unfavourable product mix,
however, led to below-expected margins for the quarter (gross profit margin
contracted 186bps YoY).
Adj. PAT up 12% YoY: GLXO’s adjusted PAT increased 12% YoY to Rs 1.6bn,
primarily reflecting the performance at the operating level that was further
buoyed by higher other income (up 52% YoY to Rs 256mn).
Maintain HOLD: The stock is currently trading at a P/E of 32.4x CY10E/27.5x
CY11E earnings. On an EV/EBITDA basis, it trades at 21.7x CY10E/18.4x CY11E.
While these valuations are at the higher end of its historical trading band, this
premium is justified given its strong balance sheet, high dividend yield, better
margins and strong earnings visibility. However, even after valuating the stock at
a premium PER of 23x Sep ’12 earnings, we do not see any significant upside
from current levels. We therefore maintain a HOLD on GLXO.
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