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GlaxoSmithKline Pharma --------------------------------------------- Maintain UNDERPERFORM
Signs of margin trending down; sales growth should pick up in subsequent quarters
● 1Q11 results were weaker than expected. Sales growth of the
pharma division was low at 12.4% vs industry growth of 14.3%
and margins were low at 35% despite March quarter being a
seasonally strong quarter for Glaxo. Margins of 35% indicate that
CY11 margins are likely to be lower than CY10 (35.3%) although
in line with the guidance of 33-35%.
● We expect sales growth to increase in the coming quarters as the
launch of two oncology products (Revolade and Votrient) was
scheduled for the June quarter and other significant launches for
CY11 include Synflorix (pneumonia vaccine), derma products and
four to six branded generics. With these launches, Glaxo should
achieve its overall sales growth of 13% for CY11.
● Reported net income includes exceptional expenses of Rs1.8 bn
related to provisions made for payment to the central government
for the case on pricing of Betamethasone. Our UNDERPERFORM
call on Glaxo is driven by its expensive valuation—currently it is
trading close to the historical high premium (Figure 2). We value
Glaxo at 25x CY11E EPS, a 20% premium to the sector average.
Sales growth tracking below guidance
1Q11 pharma business growth was low at 12.4% vs industry growth of
14.3% during the quarter. As a result, overall sales growth (including
exports) was low at 11.4% and missed our estimate. On the sales
growth front, currently the company is tracking below its growth
guidance of 13% for CY11. We believe sales growth should increase in
the June quarter as two oncology products, Revolade and Votrient, are
scheduled to be launched in the June quarter and subsequent products
to be launched during the year include Synflorix (pneumonia vaccine),
two products from Stiefel and some products in cosmetic dermatology
from Darier Labs in Mexico and four to six branded generics.
Margins in line with guidance but 1Q is seasonally strong
EBITDA missed our estimate by 6% and EBITDA margin of 35% in a
seasonally strong quarter implies that CY11 margins are likely to be
lower than 35%, although in line with the management guidance of 33-
35% (vs 35.3% achieved in CY10). The costs were higher across the
categories – material cost, personnel and other expenses (Figure 1).
Reported net income was low at Rs4.6 mn as it included an
exceptional loss of Rs1.8 bn related to provisions made for payment
to the central government for the case on pricing of Betamethasone
bulk drugs and formulations. The principal amount is Rs718 mn while
the interest component is Rs1.6 bn. Adjusted for the exceptional loss,
net income was higher by 7% due to treasury income of Rs180 mn.
Figure 1: 1Q11 standalone vs. CS estimates
(Rs mn) 1Q11A 1Q11E Diff (%) 1Q10A Y/Y %
Net sales 6,029 6,086 -1% 5,411 11%
Total expenditure 3,920 3,845 2% 3,410 15%
Material cost 2,305 2,269 2% 2,032 13%
Personnel cost 644 628 3% 553 16%
Other expenses 970 948 2% 825 18%
EBITDA 2,109 2,241 -6% 2,001 5%
EBITDA margin 35.0% 36.8% -1.8% 37.0% -2.00%
Depreciation 44 44 0% 38 18%
EBIT 2,065 2,197 -6% 1,964 5%
Other income 249 79 215% 234 6%
Interest income 331 326 2% 203 63%
Pretax income 2,645 2,601 2% 2,402 10%
Income taxes 782 864 -9% 790 -1%
Net income* 1,863 1,738 7% 1,612 16%
EPS (Rs) basic 22.0 20.5 7% 19.0 16%
*Adjusted for exceptional losses.
Source: Company data, Credit Suisse estimates
Expensive at 28x CY11; trading at historical high multiples
Glaxo’s one-year forward P/E suggests it is trading at almost twice the
forward MSCI India multiple. We agree that risks in Glaxo’s model are
lower than other Indian pharma companies; however, we do not see
further upside to multiples, and the earnings growth rate for the next
two years is low at 12.5%. Given the expensive valuation, we maintain
our UNDERPERFORM and target price of Rs1,985 (25x CY11E
earnings at a 20% premium to the sector average).
We increase our CY11E EPS by 2% to account for the beat in net
income adjusted for exceptional losses.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GlaxoSmithKline Pharma --------------------------------------------- Maintain UNDERPERFORM
Signs of margin trending down; sales growth should pick up in subsequent quarters
● 1Q11 results were weaker than expected. Sales growth of the
pharma division was low at 12.4% vs industry growth of 14.3%
and margins were low at 35% despite March quarter being a
seasonally strong quarter for Glaxo. Margins of 35% indicate that
CY11 margins are likely to be lower than CY10 (35.3%) although
in line with the guidance of 33-35%.
● We expect sales growth to increase in the coming quarters as the
launch of two oncology products (Revolade and Votrient) was
scheduled for the June quarter and other significant launches for
CY11 include Synflorix (pneumonia vaccine), derma products and
four to six branded generics. With these launches, Glaxo should
achieve its overall sales growth of 13% for CY11.
● Reported net income includes exceptional expenses of Rs1.8 bn
related to provisions made for payment to the central government
for the case on pricing of Betamethasone. Our UNDERPERFORM
call on Glaxo is driven by its expensive valuation—currently it is
trading close to the historical high premium (Figure 2). We value
Glaxo at 25x CY11E EPS, a 20% premium to the sector average.
Sales growth tracking below guidance
1Q11 pharma business growth was low at 12.4% vs industry growth of
14.3% during the quarter. As a result, overall sales growth (including
exports) was low at 11.4% and missed our estimate. On the sales
growth front, currently the company is tracking below its growth
guidance of 13% for CY11. We believe sales growth should increase in
the June quarter as two oncology products, Revolade and Votrient, are
scheduled to be launched in the June quarter and subsequent products
to be launched during the year include Synflorix (pneumonia vaccine),
two products from Stiefel and some products in cosmetic dermatology
from Darier Labs in Mexico and four to six branded generics.
Margins in line with guidance but 1Q is seasonally strong
EBITDA missed our estimate by 6% and EBITDA margin of 35% in a
seasonally strong quarter implies that CY11 margins are likely to be
lower than 35%, although in line with the management guidance of 33-
35% (vs 35.3% achieved in CY10). The costs were higher across the
categories – material cost, personnel and other expenses (Figure 1).
Reported net income was low at Rs4.6 mn as it included an
exceptional loss of Rs1.8 bn related to provisions made for payment
to the central government for the case on pricing of Betamethasone
bulk drugs and formulations. The principal amount is Rs718 mn while
the interest component is Rs1.6 bn. Adjusted for the exceptional loss,
net income was higher by 7% due to treasury income of Rs180 mn.
Figure 1: 1Q11 standalone vs. CS estimates
(Rs mn) 1Q11A 1Q11E Diff (%) 1Q10A Y/Y %
Net sales 6,029 6,086 -1% 5,411 11%
Total expenditure 3,920 3,845 2% 3,410 15%
Material cost 2,305 2,269 2% 2,032 13%
Personnel cost 644 628 3% 553 16%
Other expenses 970 948 2% 825 18%
EBITDA 2,109 2,241 -6% 2,001 5%
EBITDA margin 35.0% 36.8% -1.8% 37.0% -2.00%
Depreciation 44 44 0% 38 18%
EBIT 2,065 2,197 -6% 1,964 5%
Other income 249 79 215% 234 6%
Interest income 331 326 2% 203 63%
Pretax income 2,645 2,601 2% 2,402 10%
Income taxes 782 864 -9% 790 -1%
Net income* 1,863 1,738 7% 1,612 16%
EPS (Rs) basic 22.0 20.5 7% 19.0 16%
*Adjusted for exceptional losses.
Source: Company data, Credit Suisse estimates
Expensive at 28x CY11; trading at historical high multiples
Glaxo’s one-year forward P/E suggests it is trading at almost twice the
forward MSCI India multiple. We agree that risks in Glaxo’s model are
lower than other Indian pharma companies; however, we do not see
further upside to multiples, and the earnings growth rate for the next
two years is low at 12.5%. Given the expensive valuation, we maintain
our UNDERPERFORM and target price of Rs1,985 (25x CY11E
earnings at a 20% premium to the sector average).
We increase our CY11E EPS by 2% to account for the beat in net
income adjusted for exceptional losses.
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