Rating: Sell; Target Price: Rs2,010; CMP: Rs2,492; Downside: 19.3%
Results affected by NPPP
We maintain Sell rating on Glaxo SmithKline Pharma (GSK) with a
revised target price of Rs2,010 (earlier Rs2,130) based on 24xDec’15
EPS of Rs83.7. GSK’s results for Q1CY14 were lower than our
expectations and were affected by NPPP provisions. Some of GSK’s major
brands witnessed steep price reduction under NPPP. We expect growth
momentum to continue due to price revision of 6.2% for price
controlled products and up to 10% for those outside price control in
April’14. We have revised our CY14 and CY15 EPS estimates downward by
12% and 9% respectively. Key risks to our assumptions include faster
than expected growth of the domestic market and appreciation of rupee
against the dollar, which will bring down the cost of imported raw
materials.
$ Revenue to grow faster: GSK reported 4%YoY decline in revenues to
Rs6.10bn from Rs6.37bn. Revenues were impacted by NPPP. Some of GSK’s
major brands saw sharp reduction in price due to NPPP. However, these
brands witnessed good volume growth. Meanwhile, GSK launched five new
products, Acne-Aid for acne, Avamys for allergic rhinitis, Cardio
Check for determining cholesterol levels, Physiogel lotion for the
skin and Xgeva for bone cancer. We expect these brands to drive future
growth.
$ EBIDTA margin under pressure: GSK’s EBIDTA margin declined by 870bps
to 17.6% from 26.3% mainly due to overall increase in costs and lower
sales growth. The company’s material cost went up by 540bps to 48.3%
from 42.9% due to price reduction of its major brands under NPPP.
Personnel cost was up by 130bps to 13.7% from 12.4%. Other expenses
grew by 210bps to 20.4% from 18.3%. We expect GSK’s margin to improve
from Q2CY14 onwards due to the price revision of most of its products
during April’14.
$ Net profit to be better: GSK’s net profit before EO items declined
by 43% YoY to Rs965mn from Rs1,706mn due to sharp reduction in
margins, lower interest income and higher tax rate. Its interest
income declined by 42%YoY to 449mn from Rs770mn. The company’s tax
rate went up to 34.9% from 29.1%. We expect improvement in net profit
due to margin improvement from Q2CY14 onwards due to price revision of
its brands in April’14.
$ Recommendation and key risks: We expect the company to perform well
from Q2CY14 onwards due to price revision and new product
introductions. We have revised our EPS estimates for CY14 and CY15
downwards by 12% and 9% respectively. We maintain Sell rating on the
scrip with a revised target price of Rs2,010 based on 24x Dec’15 EPS
of Rs83.7 with a downside of 19.3% from the CMP due to its rich
valuations. Key risks to our assumptions include faster than expected
growth of the domestic market and appreciation of rupee against the
dollar, which will bring down the cost of imported raw materials.
Thanks & Regards
--
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Results affected by NPPP
We maintain Sell rating on Glaxo SmithKline Pharma (GSK) with a
revised target price of Rs2,010 (earlier Rs2,130) based on 24xDec’15
EPS of Rs83.7. GSK’s results for Q1CY14 were lower than our
expectations and were affected by NPPP provisions. Some of GSK’s major
brands witnessed steep price reduction under NPPP. We expect growth
momentum to continue due to price revision of 6.2% for price
controlled products and up to 10% for those outside price control in
April’14. We have revised our CY14 and CY15 EPS estimates downward by
12% and 9% respectively. Key risks to our assumptions include faster
than expected growth of the domestic market and appreciation of rupee
against the dollar, which will bring down the cost of imported raw
materials.
$ Revenue to grow faster: GSK reported 4%YoY decline in revenues to
Rs6.10bn from Rs6.37bn. Revenues were impacted by NPPP. Some of GSK’s
major brands saw sharp reduction in price due to NPPP. However, these
brands witnessed good volume growth. Meanwhile, GSK launched five new
products, Acne-Aid for acne, Avamys for allergic rhinitis, Cardio
Check for determining cholesterol levels, Physiogel lotion for the
skin and Xgeva for bone cancer. We expect these brands to drive future
growth.
$ EBIDTA margin under pressure: GSK’s EBIDTA margin declined by 870bps
to 17.6% from 26.3% mainly due to overall increase in costs and lower
sales growth. The company’s material cost went up by 540bps to 48.3%
from 42.9% due to price reduction of its major brands under NPPP.
Personnel cost was up by 130bps to 13.7% from 12.4%. Other expenses
grew by 210bps to 20.4% from 18.3%. We expect GSK’s margin to improve
from Q2CY14 onwards due to the price revision of most of its products
during April’14.
$ Net profit to be better: GSK’s net profit before EO items declined
by 43% YoY to Rs965mn from Rs1,706mn due to sharp reduction in
margins, lower interest income and higher tax rate. Its interest
income declined by 42%YoY to 449mn from Rs770mn. The company’s tax
rate went up to 34.9% from 29.1%. We expect improvement in net profit
due to margin improvement from Q2CY14 onwards due to price revision of
its brands in April’14.
$ Recommendation and key risks: We expect the company to perform well
from Q2CY14 onwards due to price revision and new product
introductions. We have revised our EPS estimates for CY14 and CY15
downwards by 12% and 9% respectively. We maintain Sell rating on the
scrip with a revised target price of Rs2,010 based on 24x Dec’15 EPS
of Rs83.7 with a downside of 19.3% from the CMP due to its rich
valuations. Key risks to our assumptions include faster than expected
growth of the domestic market and appreciation of rupee against the
dollar, which will bring down the cost of imported raw materials.
Thanks & Regards
--
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