EUR 120.00 For Business Accounts Only

MOSL: GSK PHARMA (Neutral)-Portfolio rationalization drives profitability

GSK PHARMA: Portfolio rationalization drives profitability; maintain Neutral given limited upside potential

(GLXO IN, Mkt Cap USD2.9b, CMP INR1183, TP INR1290, 9% Upside, Neutral)

 

• Superior margins driven by better product mix: Sales grew 7.1% YoY to INR7.8b (our estimate: INR7.6b) in 1QFY20. Gross margin improved170bp YoY to 58% due to portfolio rationalization. EBITDA margin expanded ~330bp YoY to 21.7% YoY, led by a better product mix and lower other expenses (-260bp YoY to 18.2%), partly offset by higher employee cost (+100bp YoY due to annual salary hikes and increased manpower). Other expenses include provision for VAT assessment of INR58.1m. Adjusting for the same, EBITDA was up by a strong ~26% to INR1.7b (our estimate: INR1.6b). Adj. PAT grew ~29% YoY to INR1.2b (our estimate: INR1.1b).
• Select brands drive overall growth: GLXO's secondary sales grew 10.1% YoY in the quarter. Sales growth for T-Bact/Betnesol/Augmentin/ Eltroxin was 32.3%/32.2%/19.4%/18.6% YoY - these four brands accounted for 28% of sales. On the other hand, sales for most other brands grew in single digit to near double digit, while Betnovate N sales were down by 4%. In terms of therapies, Hormones/Anti-Infective/Vaccines delivered growth of 19%/15%/11% YoY, together contributing 59% of sales. However, Derma/Pain growth was muted at 8%/5% YoY. We note that growth in the quarter was mainly driven by price, as volume growth was muted.
• Valuation view: We cut our FY20/21 EPS estimate by 2%/4.5% to INR28/INR31 to factor in the gradual slowdown in industry growth on account of the adverse impact of trade generics/Jan Aushadhi, improved hygienic conditions, and increased depreciation. We continue valuing GLXO at 43x 12M forward earnings to arrive at a TP of INR1,290. While the portfolio rationalization exercise is driving profitability, valuations provide limited upside from current levels. Maintain Neutral.