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MOSL: GSK PHARMA (Neutral)-Superior product mix/better operating leverage drives profitability

GSK PHARMA: Superior product mix/better operating leverage drives profitability

(GLXO IN, Mkt Cap USD3.5b, CMP INR1483, TP INR1590, 7% Upside, Neutral)

• Operationally in line; Sharp rise in reported PAT on income from land sale: 2QFY20 sales increased 8% YoY to INR8.8b (v/s est. of INR8.9b). Gross margin (GM) stood at 58.1% and improved 80bp YoY (stable QoQ) due to portfolio rationalization. EBITDA margin improved ~175bp YoY to 22% on account of the superior product mix and lower other expenses as % of sales (-60bp YoY to 18.2%). Employee cost was also down, 40bp YoY, supporting margin expansion. As a result, EBITDA increased ~17.5% YoY to INR1.9b (v/s est. of INR1.8b). Adj PAT came in at INR1.4b (in- line) and grew 24% YoY; reported PAT was higher at INR5b due to one- time income of INR4b on account of land sale (+INR5.5b), partly offset by impairment of assets (INR263m) and the Ranitidine product recall (INR1.1b).
• Secondary sales reflect strong growth in major brands: GLXO's secondary sales saw double-digit growth of 21.9% YoY for the quarter. Sales of Calpol/T-Bact/Augmentin/Ceftum grew 46.6%/40.3%/31.4%/30.1% YoY; these four brands together accounted for ~25% of the sales. In therapies, sales of Pain-Analgesics/Anti-Infective/Vaccines grew 37.9%/29.5%/22.8% YoY. Other therapies also grew in double-digits contributing to the overall growth for the quarter.
• Valuation view: We raise our FY20/FY21 EPS estimate by 5%/1.5% to INR32/INR35 to factor in GLXO's sustained EBITDA margin improvement led by rationalization of low value products and enhanced efforts toward higher margin products. We continue valuing GLXO at 43x 12M forward earnings to arrive at TP of INR1,590. Maintain Neutral on limited upside from current levels.