GSK Pharmaceuticals Results inline – remains steady  1QCY11 results; target price of Rs2,210.:: Macquarie Research

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GSK Pharmaceuticals
Results inline – remains steady
Event
 1QCY11 results in line with our estimates: GSK reported 1QCY11
results, with net sales of Rs6b (up 11.4% yoy) and PAT before
exceptionals of Rs1.9b (up15.6% yoy) on the back of strong double-digit
growth in vaccines and mass specialities segments. EBITDA margin came
at 35.7%. Provision created for government claims impacted the reported
profit for the quarter. We maintain our Neutral rating and TP of Rs2,210.

Impact
 Growth across all segments: Net Sales grew by 11.4% YoY to Rs6b
and PAT grew by 15.6% YoY to Rs1.9b. The core pharma business grew
by 12.4% YoY. Vaccines and mass speciality businesses registered
strong double-digit growth, driven by the launch of branded generics,
increasing the extension of rural coverage and focussed efforts in the
hospital segment. GSK has further added 550 sales reps to the field force.
 Reported PAT impacted by provision for government claims: There was
an exceptional item of Rs1.8b (net of tax) on the account of provision for
central government claims in respect of overcharging on some products
under price-control (including interest accrued till date on it starting 1981).
 Market approvals for innovative products: Marketing approvals were
received for two innovative products i.e. Votrient for renal carcinoma and
Revolade for platelet depletion. GSK plans launch of these in CY11, but
upside from the same will be limited near term due to a slower ramp-up.
 Leeway to pursue strategic alternatives: With ~Rs20b in net cash and a
negative WC, GSK has one of the strongest balance sheets in the sector. This
provides much requisite leeway to pursue strategic alternatives. The
company remains open to acquisitions of assets at a reasonable valuation
that would help strengthen the India formulation business.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs2,210.00 based on a PER methodology.
 Catalyst: Value-accretive acquisitions
Action and recommendation
 We value GSK at a PER of 24x CY12E PE, a 20% premium to the sector
average PER, given the stable nature of GSK's earnings profile, highreturn
ratios, free cash-flow generation and healthy dividend yield support.
 Although we believe in the long-term fundamentals of GSK, the current
price leaves little valuation buffer, in our view. We recommend adding on
weakness and maintain our Neutral rating with a target price of Rs2,210.