Management Speak: Glaxosmithkline Pharma (Underperformer) - Better days ahead

We recently interacted with Glaxo mgt - Mr Annaswamy Vaidheesh, VP South Asia & Managing Director and Ms Puja Thakur, South Asia Finance Director and Chief Financial Officer. Below are the key takeaways.

Worst is behind: Glaxo was hit by a perfect storm over the last few years with the GST implementation, significant supply issues as well as rollout of NELM 2013 / NELM 2016. However, the worst is behind with the stabilization of the regulatory issues and resolution of the supply issues. Mgt has leveraged the challenges to undertake several strategic / tactical steps to enhance operational efficiencies in the system and to create a strong platform for future growth. Some of these measures include rationalization of admin spends etc. and channelize savings into reinforcing sales capabilities (FF increased by 30% over last two years) to drive enhanced focus on key therapy segments / brands 

Focus on driving growth now: With the stabilization of the business and commissioning of the ~Rs8bn Vemgal plant by Q4CY19, Glaxo is now focussed on increasing demand for its products. Trial batches are currently going on and the plant is expected to be commissioned by Q4CY19. The full impact should be visible from FY21 onwards. The facility commissioning should enable Glaxo to reduce outsourced manufacturing component to 35% from 60% currently and should significantly de-risk the facility from supplier issues which have impacted it in the recent past

Steady growth ahead: Glaxo estimates that the acute market will grow by 6-7% with chronic growing by 13-15% and expects to outgrow the market by ~10%. The vaccines segment should continue to grow at 15-16% annually. Given that acute segments account for 90% of the Glaxo’s pharma portfolio, we est that it should translate into 10-11% consolidated revenue growth for the company with improving EBITDA margins.

Valuations & view

After a prolonged period of slow growth and supply related disruptions, Glaxo had begun to shows signs of turning the corner in terms of clocking double digit revenue growth over last few quarters. Despite the likely turnaround, rich valuations (~41x FY21E EPS; substantial premium to MNCs like Pfizer and Sanofi) and limited near-term triggers would cap upside from these levels. Reiterate Underperformer, with a target price of Rs1,190/share (35x FY21E EPS).