1QFY2018 Result Update | Pharmaceutical

August 3, 2017

GlaxoSmithKline Pharmaceuticals

NEUTRAL

CMP

`2,377

Performance Highlights

Target Price

Y/E Mar (` cr)

1QFY2018

4QFY2017

% chg (QoQ)

1QFY2017

% chg (YoY)

Investment Period

12 months

Net Sales

587

763

(23.1)

685

(14.3)

Other income

Stock Info

(3.4)

(26.1)

Sector

Pharmaceutical

Gross profit

316

402

(21.5)

371

(14.8)

Market Cap (` cr)

20,136

Operating profit

-1

116

(100.5)

(100.9)

Net Debt (` cr)

(936)

Adj. PAT

(79.5)

(75.0)

Beta

0.2

Source: Company, Angel Research

52 Week High / Low

3,343/2,309

GlaxoSmithKline Pharmaceuticals (GSK) posted lower than expected results on

Avg. Daily Volume

2,050

sales and OPM fronts for 1QFY2018. The revenues came in at `587cr v/s.

Face Value (`)

`700cr expected, registering a yoy de-growth of 14.3%, mainly on the back of

BSE Sensex

32,575

GST implementation. On the OPM front, the EBDITA margins came in at (0.1)%

Nifty

10,115

(v/s. 12.6% expected) as compared to 10.2% in 1QFY2017, mainly driven by

Reuters Code

GLAX.BO

lower sales during the quarter. The Adj. PAT came in at `18cr v/s. `71cr in

Bloomberg Code

GLXO@IN

1QFY2017, a yoy dip of 75.0%. We maintain our Neutral.

Results lower than expectations: GlaxoSmithKline Pharmaceuticals (GSK) posted

Shareholding Pattern (%)

lower than expected results on sales and OPM fronts for 1QFY2018. The

Promoters

75.0

revenues came in at `587cr v/s. `700cr expected, registering a yoy de-growth of

MF / Banks / Indian Fls

10.9

14.3%, mainly on the back of GST implementation. Adjusted for the GST impact,

FII / NRIs / OCBs

2.1

revenue grew 6% yoy in 1QFY2018. On the OPM front, the EBDITA margins

Indian Public / Others

12.0

came in at (0.1)%% (v/s. 12.6% expected) as compared to 10.2% in 1QFY2017.

This was mainly driven by lower sales during the quarter. The Adj. PAT for the

quarter came in at `18cr v/s. `71cr in 1QFY2017, a yoy dip of 75.0%.

Abs. (%)

3m 1yr

3yr

Outlook and valuation: On the operational front, we expect the company’s net sales

Sensex

8.9

16.3

27.8

to post a CAGR of 11.7% to `3,651cr, while the EPS is expected to post a CAGR of

Glaxo

(12.7)

(26.5)

(4.6)

30.6% over FY2017-19E. We remain Neutral on the stock.

3-year price chart

Key financials (Consolidated)

4,000

Y/E Mar (` cr)

FY2016

FY2017

FY2018E

FY2019E

3,500

Net sales

2,741

2,927

3,260

3,651

3,000

% chg

(16.2)

6.8

11.4

12.0

Net profit

2,500

374

291

391

496

% chg

2,000

(26.5)

(22.2)

34.3

27.0

EPS (`)

1,500

44.2

34.4

46.1

58.6

EBITDA (%)

16.5

11.8

15.0

18.0

P/E (x)

53.8

69.2

51.5

40.6

Source: Company, Angel Research

RoE (%)

18.7

13.9

20.0

26.5

RoCE (%)

19.4

14.0

20.4

28.9

P/BV (x)

9.2

10.0

10.6

10.9

Sarabjit Kour Nangra

EV/Sales (x)

6.8

6.6

6.0

5.5

+91 22 39357800 Ext: 6806

EV/EBITDA (x)

[email protected]

41.5

55.6

39.9

30.4

Source: Company, Angel Research; Note: CMP as of August 1, 2017

Please refer to important disclosures at the end of this report

Glaxo Pharma | 1QFY2018 Result Update

Exhibit 1: 1QFY2018 - Standalone performance

Y/E March (` cr)

1QFY2018

4QFY2017

% chg (QoQ)

1QFY2017

% chg (YoY)

FY2017

FY2016

% chg

Net Sales

587

763

(23.1)

685

(14.3)

2,921

2,753

6.1

Other income

(3.4)

(26.1)

145

197

(26.3)

Total Income

621

799

(22.3)

731

(15.1)

3,066

2,950

3.9

Gross profit

316

402

(21.5)

371

(14.8)

1,527

1,525

0.1

Gross margin

53.8

52.7

54.1

52.3

55.4

Operating profit

-1

116

(100.5)

(100.9)

346

404

(14.2)

Operating margin (%)

(0.1)

15.2

10.2

11.9

14.7

Interest

Depreciation & Amortization

(3.5)

40.0

5.6

PBT & Exceptional Items

144

(82.0)

111

(76.7)

465

576

(19.2)

Less : Exceptional Items

Profit before tax

170

(77.3)

112

(65.6)

511

577

(11.5)

Provision for taxation

(79.8)

(69.3)

174

201

(13.5)

Reported PAT

113

(76.5)

(63.4)

337

375

(10.1)

Adj. Net profit

(79.5)

(75.0)

291

373

(22.0)

EPS (`)

2.1

10.2

8.4

34.4

44.0

Source: Company, Angel Research,

Exhibit 2: 1QFY2018 - Actual v/s. Angel estimates

(` cr)

Actual

Estimates

Variation (%)

Net sales

587

700

(16.2)

Other income

(28.2)

Operating profit

(1)

(100.7)

Tax

(54.2)

Adj. net profit

104

(82.9)

Source: Company, Angel Research

Revenue de-grew by 14.3% yoy

GlaxoSmithKline Pharmaceuticals (GSK) posted lower than expected results on

sales and OPM fronts for 1QFY2018. The revenues came in at `587cr v/s. `700cr

expected, registering a yoy de-growth of 14.3%, mainly on the back of GST

implementation. Adjusted for the GST impact, revenue grew 6% yoy in 1QFY2018.

August 3, 2017

Glaxo Pharma | 1QFY2018 Result Update

Exhibit 3: Sales trend

800

783

40.0

763

35.0

30.0

685

689

700

25.0

20.0

15.0

587

600

10.0

5.0

0.0

500

(5.0)

(10.0)

(15.0)

400

(20.0)

1QFY2017 2QFY2017 3QFY2017 4QFY2017 1QFY2018

Sales

Growth (YoY)

Source: Company, Angel Research

OPM comes lower on the back of lower sales

On the OPM front, the EBDITA margins came in at (0.1)% (v/s. 12.6% expected) as

compared to 10.2% in 1QFY2017. This was mainly driven by lower sales during

the quarter. The Gross margins were almost flat at 53.0% in 1QFY2017 v/s.

54.1% in 1QFY2018. Employee expenses and other expenses grew by 11.9% and

0.9% respectively.

Exhibit 4: OPM trend

25.0

20.0

15.2

15.0

10.2

10.0

5.0

0.0

(0.1)

(5.0)

(10.0)

1QFY2017 2QFY2017 3QFY2017 4QFY2017 1QFY2018

Source: Company, Angel Research

Net profit much lower than estimated

The Adj. PAT during the quarter came in at `18cr v/s. `71cr in 1QFY2017, a yoy

dip of 75.0%. The reported profit came in at `26cr v/s. `72cr, a yoy de-growth of

63.4%. Also, during the quarter the company posted other income of `34cr v/s.

`46cr in 1QFY2017.

August 3, 2017

Glaxo Pharma | 1QFY2018 Result Update

Recommendation rationale

Renewed focus on the Indian market: GSK is among the top ten players in the

Indian pharmaceutical market, having a market share of ~3.7%. Unlike other

MNCs, the company has been amongst the few which have taken initiatives to

grow their businesses in the Indian market with consistent launch of new products.

Over the last six years, the company has strategically decided to expand its

presence in the Specialty segment. The Specialty segment’s contribution to sales

has reached 23% (as of 2013). Another segment which is strong for the company

is the area of vaccines, where GSK Vaccines has become the leading company in

the private market for vaccines in India. The recently introduced vaccine for

pneumococcal conjugate disease, Synflorix, has become the biggest brand in the

vaccine portfolio of the company in the second year of its launch. The efforts of the

company in raising awareness about vaccines and preventable diseases continue

with increasing fervor. Also, in FY2015, GlaxoSmithKline Plc (Glaxo), London, UK,

entered into three inter-conditional agreements with Novartis AG (Novartis), Basel,

Switzerland. In one such agreement, Glaxo agreed to acquire Novartis’ vaccines

business (excluding influenza vaccine) and its manufacturing capabilities and

facilities, and in the second agreement, Glaxo agreed to sell the rights of its

Marketed Oncology Portfolio, related R&D activities and AKT Inhibitors currently in

development to Novartis. Globally, these transactions with Novartis were

completed on March 2, 2015.

On the other hand, its other key segments like mass markets and mass specialty,

which contribute 60% of its sales, de-grew by 12% in CY2013. This was as a result

of a number of products of the company having come under the DPCO 2013

ruling, resulting in reduction in prices of its drugs, which impacted its sales in

CY2013. Along with this, the supply constraints, mainly from local supplies during

FY2015, have been impacting its performance. FY2017 was another year, where

the company’s, sales got impacted on the back of the government’s pricing cuts.

Overall, for FY2017-19E, we expect the domestic formulation business of the

company to grow at a CAGR of 11.7%.

Significant capex plans ahead indicate revival in growth: Global pharmaceutical

major Glaxo announced

`864cr investment in India to set up a medicine

manufacturing unit. The new facility will substantially increase the company’s

manufacturing base. The drug maker is proactively building capacity in the country

as it delivers its portfolio of products in areas such as gastroenterology and anti-

inflammatory medicines. When complete, the factory will make pharmaceutical

products for the Indian market at a rate of up to 8bn tablets and 1bn capsules a

year. The facility, will include a warehouse, site infrastructure, and utilities to

support the manufacturing and packing of medicines. It showcases GSK's latest

commitment to its manufacturing network in India where the company has invested

`1,017cr over the last decade. The development is positive and comes after a long

lull in terms of investments.

August 3, 2017

Glaxo Pharma | 1QFY2018 Result Update

Outlook and valuation

GSK has a strong balance sheet with cash of ~`900cr, which could be used for

future acquisitions or higher dividend payouts. The company’s parent company

Glaxo increased stake in it through a voluntary open offer, after which Glaxo holds

75% stake in the Indian subsidiary. The buy-back of shares is a strong indicator

from the Management towards the performance of its listed Indian entity,

especially as it comes after the recent `864cr investment plan announced by the

company to further its growth prospects in the Indian pharmaceuticals market. The

said investments are expected to fructify by 2017.

On the operational front, we expect the company’s net sales to post a CAGR of

11.7% to `3,681cr and EPS to register a CAGR of 30.7% to `58.7 over FY2017-

19E. At the current level, the stock is trading at 51.5x and 40.5x its FY2018E and

FY2019E earnings respectively. We remain Neutral on the stock.

Exhibit 6: Key assumptions

FY2018E

FY2019E

Sales growth (%)

11.4

12.0

Growth in employee expenses (%)

11.0

9.0

Operating margin (%)

15.0

18.1

Capex (` cr)

200

Source: Company, Angel Research

Exhibit 7: One-year forward PE

5,500

4,500

3,500

2,500

1,500

500

Price

18x

30x

42x

54x

Source: Company, Angel Research

August 3, 2017

Glaxo Pharma | 1QFY2018 Result Update

Exhibit 8: Recommendation summary

Company

Reco

CMP

Tgt. price

Upside

FY2019E

FY17-19E

FY2019E

(`)

% PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Accumulate

525

600

14.4

19.3

2.2

11.3

12.8

24.3

20.6

Aurobindo Pharma

Accumulate

735

877

12.0

14.3

2.2

10.0

14.2

25.3

22.7

Cadila Healthcare

Sell

542

450

(16.9)

25.5

4.1

20.2

21.0

17.3

22.9

Cipla

Sell

562

465

(18.0)

23.2

2.4

15.0

39.2

11.0

13.2

Dr Reddy's

Neutral

2,427

21.9

2.4

13.4

23.6

11.2

13.0

Dishman Pharma

Under Review

301

18.9

1.3

10.1

(6.8)

2.9

2.5

GSK Pharma

Neutral

2,377

40.6

5.5

30.4

30.6

28.9

26.5

Indoco Remedies

Sell

200

153

(23.5)

15.7

1.5

10.3

23.0

11.2

15.0

Ipca labs

Buy

483

613

28.5

7.9

0.6

4.1

27.9

12.8

11.2

Lupin

Buy

1,018

1,526

49.9

14.7

2.0

8.5

10.4

20.6

17.8

Sanofi India*

Neutral

4,286

27.9

2.9

17.2

9.2

23.9

25.8

Sun Pharma

Buy

535

712

33.2

16.5

3.1

12.2

1.2

15.1

18.8

Source: Company, Angel Research; Note: * December year ending;

August 3, 2017

Glaxo Pharma | 1QFY2018 Result Update

Company Background

GlaxoSmithKline Pharmaceuticals (GSK) is the sixth largest pharmaceutical player

in the Indian market with a market share of ~3.7%. The company’s product

portfolio includes both, prescription medicines and vaccines. GSK sells prescription

medicines across therapeutic areas such as anti-infectives, dermatology,

gynecology, diabetes, oncology, cardiovascular diseases and respiratory diseases.

A large portion of the company’s revenue comes from the acute therapeutic

portfolio. However, the company is now scouting for opportunities in high-growth

therapeutic areas such as CVS, CNS, diabetes and oncology. Further, with a strong

parentage, the company plans to increase its product portfolio through patented

launches and vaccines. To fructify the same, the company plans to enhance its

manufacturing assets with its parent company investing `864cr in it; the capacity

expansion is expected to fructify in 2017.

August 3, 2017

Glaxo Pharma | 1QFY2018 Result Update

Profit & loss statement

Y/E March (` cr)

CY2013

FY2015

FY2016

FY2017 FY2018E FY2019E

Gross sales

2,589

3,328

2,800

2,999

3,357

3,760

Less: Excise duty

Net sales

2,538

3,272

2,741

2,927

3,290

3,685

Other operating income

Total operating income

2,563

3,305

2,768

2,954

3,318

3,713

% chg

(3.3)

28.9

(16.2)

6.7

12.3

11.9

Total expenditure

2,034

2,690

2,289

2,581

2,757

3,016

Net raw materials

1,164

1,510

1,233

1,398

1,481

1,658

Other Mfg costs

115

107

111

115

Personnel

362

493

443

483

543

590

Other

420

572

514

593

623

654

EBITDA

504

582

452

346

533

669

% chg

(33.6)

15.5

(22.4)

(23.5)

54.3

25.4

(% of Net Sales)

19.9

17.8

16.5

11.8

16.2

18.1

Depreciation& amortization

EBIT

484

557

427

319

481

608

% chg

(34.7)

15.0

(23.3)

(25.2)

50.7

26.5

(% of Net Sales)

19.1

17.0

15.6

10.9

14.6

16.5

Interest & other charges

Other income

177

200

125

119

(% of PBT)

Share in profit of Associates

Recurring PBT

685

789

579

465

627

754

% chg

(27.5)

15.1

(26.5)

(19.7)

34.8

20.1

Extraordinary expense/(Inc.)

(26)

(3)

(46)

PBT (reported)

711

756

582

511

627

754

Tax

230

279

203

174

207

249

(% of PBT)

32.3

36.9

34.8

31.3

33.0

PAT (reported)

482

477

377

337

420

505

Add: Share of earnings

of asso.

Less: Minority interest (MI)

Prior period items

Exceptional items

PAT after MI (reported)

482

477

377

337

420

505

ADJ. PAT

464

509

374

291

420

505

% chg

(29.4)

9.8

(26.5)

(22.2)

44.4

20.1

(% of Net Sales)

18.3

15.6

13.7

9.9

12.8

13.7

Basic EPS (`)

Fully diluted EPS (`)

% chg

(29.4)

9.8

(26.5)

(22.2)

44.4

20.1

August 3, 2017

Glaxo Pharma | 1QFY2018 Result Update

Balance Sheet

Y/E March (` cr)

CY2013

FY2015

FY2016

FY2017

FY2018E

FY2019E

SOURCES OF FUNDS

Equity share capital

Preference Capital

Reserves& surplus

1,905

1,744

2,099

1,922

1,847

1,797

Shareholders funds

1,990

1,829

2,183

2,007

1,932

1,881

Minority Interest

Total loans

Other long-term liabilities

Long-term provisions

242

273

291

276

Deferred tax liability

(92)

(83)

(101)

(92)

Total liabilities

2,148

2,026

2,374

2,193

2,118

2,069

APPLICATION OF FUNDS

Gross block

323

467

725

1,105

1,305

1,505

Less: Acc. Depreciation

247

272

297

323

375

436

Net block

195

428

782

930

1,070

Capital work-in-progress

Goodwill

Other non-current assets

Long-term loans and adv.

238

307

302

374

428

479

Investments

Current assets

2,614

2,587

2,174

1,674

1,489

1,345

Cash

2,042

1,911

1,392

932

655

240

Loans & advances

238

122

123

132

148

166

Other

335

554

658

610

686

940

Current liabilities

889

1,107

579

720

811

908

Net current assets

1,725

1,480

1,595

954

678

438

Mis. Exp. not written off

Total Assets

2,148

2,026

2,374

2,193

2,118

2,069

August 3, 2017

Glaxo Pharma | 1QFY2018 Result Update

Cash flow statement

Y/E March (` cr)

CY2013

FY2015

FY2016

FY2017

FY2018E FY2019E

Profit before tax and exceptional

711

756

582

557

627

754

Depreciation

(Inc)/Dec in working capital

114

(633)

181

(2)

(174)

Direct taxes paid

230

279

203

174

207

249

Cash Flow from Operations

517

616

(229)

590

471

391

(Inc.)/Dec.in fixed assets

(49)

(144)

(258)

(381)

(200)

(Inc.)/Dec. in investments

(45)

(10)

Cash Flow from Investing

(93)

(154)

(253)

(380)

(200)

Issue of equity

Inc./(Dec.) in loans

Dividend paid (Incl. Tax)

(495)

(624)

(495)

(297)

(495)

(555)

Others

459

Cash Flow from Financing

(448)

(593)

(37)

(297)

(495)

(555)

Inc./(Dec.) in cash

(25)

(131)

(519)

(460)

(277)

(415)

Opening cash balances

2,067

2,042

1,911

1,392

932

655

Closing cash balances

2,042

1,911

1,392

932

655

240

August 3, 2017

Glaxo Pharma | 1QFY2018 Result Update

Key ratio

Y/E March

CY2013

FY2015

FY2016

FY2017

FY2018E

FY2019E

Valuation Ratio (x)

P/E (on FDEPS)

44.4

40.4

55.0

70.8

49.0

40.8

P/CEPS

41.1

41.0

51.3

50.4

43.6

36.4

P/BV

10.3

11.3

9.4

10.3

10.7

10.9

Dividend yield (%)

2.1

1.2

2.1

2.3

EV/Sales

7.3

5.7

7.0

6.7

6.1

5.5

EV/EBITDA

36.8

32.1

42.5

56.9

37.4

30.4

EV / Total Assets

8.6

9.2

8.1

9.0

9.4

9.8

Per Share Data (`)

EPS (Basic)

54.8

60.1

44.2

34.4

49.6

59.6

EPS (fully diluted)

54.8

60.1

44.2

34.4

49.6

59.6

Cash EPS

59.2

59.3

47.4

48.3

55.8

66.7

DPS

50.0

30.0

50.8

56.8

Book Value

234.9

215.9

257.8

236.9

228.0

222.1

Returns (%)

RoCE (Pre-tax)

22.4

26.7

19.4

14.0

22.3

29.1

Angel ROIC (Pre-tax)

22.4

26.7

19.4

14.0

22.3

29.1

RoE

23.2

26.7

18.7

13.9

21.3

26.5

Turnover ratios (x)

Asset Turnover (Gross Block)

8.6

8.4

4.6

3.2

2.8

2.6

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

(1.0)

(0.6)

(0.5)

(0.3)

(0.1)

Net debt to EBITDA

(4.0)

(3.3)

(3.1)

(2.7)

(1.2)

(0.4)

Interest Coverage (EBIT / Int.)

August 3, 2017

Glaxo Pharma | 1QFY2018 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

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registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

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/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public

offering of securities of the company covered by Analyst during the past twelve months.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

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companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine

the merits and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

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contrary view, if any.

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Disclosure of Interest Statement

Glaxo Pharma

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

August 3, 2017