2QFY2017 Result Update | Pharmaceutical
November 9, 2016
GlaxoSmithKline Pharmaceuticals
NEUTRAL
CMP
`2,719
Performance Highlights
Target Price
-
Y/E Mar (` cr)
2QFY2017 1QFY2017
% chg (QoQ) 2QFY2016
% chg (YoY)
Investment Period
-
Net Sales
783
685
14.3
700
11.8
Stock Info
Other income
34
44
(22.2)
40
(14.2)
Sector
Pharmaceutical
Gross profit
421
371
13.6
390
8.0
Market Cap (`
cr)
23,030
Operating profit
124
70
77.2bp
121
3.3bp
Net Debt (` cr)
(1,055)
Adj. PAT
98
71
37.6
101
(2.9)
Beta
0.43
Source: Company, Angel Research
52 Week High / Low
3,850/2,710
Avg. Daily Volume
1,838
For 2QFY2017, sales stood at `783cr vs. `700cr expected and vs. `700cr in
Face Value (`)
10
2QFY2016, a yoy growth of 11.8%. On the operating front, the OPM came in at
BSE Sensex
27,591
15.9% vs. 17.2% in 2QFY2016 and vs. 17.0% expected. The company’s OPM
Nifty
8,544
was impacted by other expenses, which grew by 40.5% yoy. Thus, the company
Reuters Code
GLAX.BO
posted an Adj. net profit of `98cr vs. `101cr in 2QFY2016, a yoy de-growth of
Bloomberg Code
[email protected]
2.9%. We maintain our Neutral rating on the stock.
Results below expectations: For 2QFY2017, sales stood at `783cr vs. `700cr
Shareholding Pattern (%)
expected and vs. `700cr in 2QFY2016, a yoy growth of 11.8%. On the
Promoters
75.0
operating front, the OPM came in at 15.9% vs. 17.2% in 2QFY2016 and vs.
MF / Banks / Indian Fls
10.5
17.0% expected. The company’s OPM was impacted by other expenses, which
FII / NRIs / OCBs
2.4
grew by 40.5% yoy. Thus, the company posted an Adj. net profit of `98cr vs.
Indian Public / Others
12.1
`101cr in 2QFY2016, a yoy de-growth of 2.9%.
Outlook and valuation: Company has a strong balance sheet with cash of
Abs. (%)
3m 1yr
3yr
~`2,000cr, which could be used for future acquisitions or higher dividend pay
Sensex
(2.1)
5.0
33.5
outs. On the operational front, we expect the company’s net sales to post a
Glaxo
(12.7)
(14.8)
9.6
CAGR of 9.9% to `3,312cr and EPS to register a mere CAGR of 17.3% to `60.8
over FY2016-18E. We remain Neutral on the stock.
3-year price chart
Key financials (Consolidated)
4,000
Y/E Mar (` cr)
FY2015*
FY2016
FY2017E
FY2018E
3,500
Net sales
3,272
2,741
3,000
3,312
3,000
% chg
28.9
(16.2)
9.4
10.4
2,500
Net profit
509
374
394
515
2,000
% chg
9.8
(26.5)
5.2
30.9
1,500
EPS (`)
60.1
44.2
46.5
60.8
EBITDA (%)
17.8
16.5
15.4
20.6
P/E (x)
Source: Company, Angel Research
45.2
61.5
58.5
44.7
RoE (%)
26.7
21.2
23.9
32.1
RoCE (%)
26.7
21.7
22.8
34.6
P/BV (x)
12.6
13.6
14.4
14.3
Sarabjit Kour Nangra
EV/Sales (x)
6.5
7.9
7.3
6.7
+91 22 39357800 Ext: 6806
EV/EBITDA (x)
36.3
48.0
47.4
32.4
[email protected]
Source: Company, Angel Research; Note: CMP as of November 8, 2016; * 15 months numbers
Please refer to important disclosures at the end of this report
1
Glaxo Pharma | 2QFY2017 Result Update
Exhibit 1: 2QFY2017 - Standalone performance
Y/E March (` cr)
2QFY2017
1QFY2017
% chg (QoQ) 2QFY2016
% chg (YoY) 1HFY2017 1HFY2016
% chg
Net Sales
783
685
14.3
700
11.8
1,468
1,334
10.0
Other income
34
44
(22.2)
40
(14.2)
78
86
(8.7)
Total Income
817
729
12.0
740
10.4
1,547
1,420
8.9
Gross profit
421
371
13.6
390
8.0
792
732
8.2
Gross margin
53.8
54.1
55.7
54.0
54.9
Operating profit
124
70
77.2
121
3.3
195
224
(13.1)
Operating margin (%)
15.9
10.2
17.2
13.3
16.8
Interest
0
0
-
0
-
0
0
-
Depreciation & Amortization
7
5
22.5
5
22.5
12
10
19.5
PBT & Exceptional Items
152
109
39.7
155
(1.9)
261
300
(12.9)
Less : Exceptional Items
2
2
-
(8)
-
3
(10)
Profit before tax
154
111
38.8
147
4.6
265
290
(8.7)
Provision for taxation
54
39
38.9
51
5.0
92
100
(7.9)
Reported PAT
99
72
36.8
96
3.5
171
190
(9.7)
Adj. Net profit
98
71
37.6
101
(2.9)
170
196
(13.5)
EPS (`)
11.5
8.4
11.9
20.1
23.2
Source: Company, Angel Research, Note- Full year numbers are consolidated numbers
Exhibit 2: 2QFY2017 - Actual Vs Angel estimates
(` cr)
Actual
Estimates
Variation (%)
Net sales
783
700
11.8
Other income
34
44
(22.2)
Operating profit
124
119
4.6
Tax
54
54
(0.2)
Adj. net profit
98
102
(4.3)
Source: Company, Angel Research
Revenue grew by 11.8%
Sales grew 11.8% yoy to `783cr (vs. `700cr expected). The growth was primarily
driven by 16% volume increase. The volume growth was partially moderated due
to the impact of NLEM related mandatory price cuts.
Exhibit 3: Sales trend
800
783
40.0
729
35.0
692
686
685
30.0
700
25.0
20.0
600
15.0
10.0
5.0
500
0.0
(5.0)
400
(10.0)
2QFY2016
3QFY2016
4QFY2016
1QFY2017
2QFY2017
Sales
Growth (YoY)
Source: Company, Angel Research
November 9, 2016
2
Glaxo Pharma | 2QFY2017 Result Update
OPM comes in lower on a yoy basis at 15.9%
On the operating front, the gross margin came in at 53.8% vs. 55.7% in
2QFY2016. The OPM came in lower at 15.9% vs. 17.2% in 2QFY2016 and vs.
our expectation of 17.0%.
Exhibit 4: OPM trend
24.0
19.0
17.8
17.2
14.1
15.9
14.0
10.2
9.0
2QFY2016
3QFY2016
4QFY2016
1QFY2017
2QFY2017
Source: Company, Angel Research
Net profit lower than estimated
The reported net profit came in at `99cr vs. `96cr in 2QFY2017. The Adj. net
profit came in at `98cr vs. `101cr in 2QFY2017, a yoy de-growth of 2.9% and
lower than our expectation of `102cr.
Exhibit 5: Adjusted net profit trend
150
101
95
98
100
82
71
50
0
2QFY2016
3QFY2016
4QFY2016
1QFY2017
2QFY2017
Source: Company, Angel Research
November 9, 2016
3
Glaxo Pharma | 2QFY2017 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 vaccine, 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. However, going forward, with
company’s own facilities coming on stream in FY2017, we expect the volatility in
sales to end. Overall, for FY2016-18E, we expect the domestic formulation
business of the company to grow at a CAGR of 10.0%.
Significant capex plans ahead indicate revival in growth: Global pharmaceutical
major Glaxo announced an `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, expected to be operational by 2017, 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.
November 9, 2016
4
Glaxo Pharma | 2QFY2017 Result Update
Outlook and valuation
GSK has a strong balance sheet with cash of ~`2,000cr, 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
9.9% to
`3,312cr and EPS to register a CAGR of
17.3% to
`60.8 over
FY2016-18E. At current level, the stock is trading at 58.5x and 44.7x its FY2017E
and FY2018E earnings, respectively. We remain Neutral on the stock.
Exhibit 6: Key assumptions
FY2017E
FY2018E
Sales growth (%)
9.4
10.2
Growth in employee expenses (%)
16.2
10.0
Operating margin (%)
15.4
20.6
Capex (` cr)
200
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
November 9, 2016
5
Glaxo Pharma | 2QFY2017 Result Update
Exhibit 8: Recommendation summary
Company
Reco
CMP Tgt. price Upside
FY2018E
FY16-18E
FY2018E
(`)
(`)
% PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)
Alembic Pharma
Neutral
655
-
-
21.6
2.9
13.5
(10.8)
27.5
25.3
Aurobindo Pharma Buy
757
877
15.9
16.0
2.6
11.1
18.1
22.5
26.1
Cadila Healthcare
Buy
375
-
-
19.5
3.0
13.7
13.4
22.7
25.7
Cipla
Neutral
536
-
-
19.7
2.5
13.6
20.4
13.5
15.2
Dr Reddy's
Neutral
3,115
-
-
21.8
2.8
12.5
1.7
16.2
15.9
Dishman Pharma
Neutral
237
-
-
21.0
2.3
10.3
3.1
10.3
10.9
GSK Pharma*
Neutral
2,719
-
-
44.7
6.8
32.8
17.3
35.3
32.1
Indoco Remedies
Neutral
277
-
-
17.7
2.1
11.4
31.5
19.1
19.2
Ipca labs
Accumulate
572
613
7.2
29.0
2.0
13.1
36.5
8.8
9.4
Lupin
Buy
1,509
1,809
19.9
21.8
3.6
13.4
17.2
24.4
20.9
Sanofi India
Neutral
4,277
-
-
24.9
3.3
17.8
22.2
24.9
28.8
Sun Pharma
Buy
635
944
48.6
19.4
3.8
12.2
22.0
33.1
18.9
Source: Company, Angel Research; Note: * December year ending;
November 9, 2016
6
Glaxo Pharma | 2QFY2017 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,
gynaecology, 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.
November 9, 2016
7
Glaxo Pharma | 2QFY2017 Result Update
Profit & loss statement
Y/E March (` cr)
CY2012
CY2013
FY2015
FY2016
FY2017E FY2018E
Gross sales
2,692
2,589
3,328
2,800
3,072
3,379
Less: Excise duty
71
51
56
59
72
68
Net sales
2,621
2,538
3,272
2,741
3,000
3,312
Other operating income
29
24
32
27
27
27
Total operating income
2,651
2,563
3,305
2,768
3,027
3,339
% chg
11.4
(3.3)
28.9
(16.2)
9.4
10.3
Total expenditure
1,862
2,034
2,690
2,289
2,537
2,629
Net raw materials
1,104
1,164
1,510
1,233
1,530
1,490
Other Mfg costs
94
89
115
99
107
115
Personnel
296
362
493
443
450
533
Other
369
420
572
514
450
491
EBITDA
759
504
582
452
463
682
% chg
2.1
(33.6)
15.5
(22.4)
2.5
47.3
(% of Net Sales)
29.0
19.9
17.8
16.5
15.4
20.6
Depreciation& amortization
18
20
25
25
37
45
EBIT
741
484
557
427
426
637
% chg
2.6
(34.7)
15.0
(23.3)
(0.2)
49.6
(% of Net Sales)
28.3
19.1
17.0
15.6
14.2
19.2
Interest & other charges
-
-
-
-
-
-
Other income
175
177
200
125
125
125
(% of PBT)
Share in profit of Associates
-
-
-
-
-
-
Recurring PBT
945
685
789
579
579
790
% chg
4.4
(27.5)
15.1
(26.5)
(0.1)
36.5
Extraordinary expense/(Inc.)
101
(26)
33
(3)
-
-
PBT (reported)
844
711
756
582
579
790
Tax
318
230
279
203
185
275
(% of PBT)
37.7
32.3
36.9
34.8
32.0
34.8
PAT (reported)
526
482
477
377
394
515
Add: Share of earnings
-
-
-
-
-
-
of asso.
Less: Minority interest (MI)
-
-
-
-
-
-
Prior period items
-
-
-
-
-
-
Exceptional items
PAT after MI (reported)
526
482
477
377
394
515
ADJ. PAT
657
464
509
374
394
515
% chg
12.0
(29.4)
9.8
(26.5)
5.2
30.9
(% of Net Sales)
25.1
18.3
15.6
13.7
13.1
15.6
Basic EPS (`)
78
55
60
44
46
61
Fully diluted EPS (`)
78
55
60
44
46
61
% chg
12.0
(29.4)
9.8
(26.5)
5.2
30.9
November 9, 2016
8
Glaxo Pharma | 2QFY2017 Result Update
Balance Sheet
Y/E March (` cr)
CY2012
CY2013
FY2015
FY2016
FY2017E
FY2018E
SOURCES OF FUNDS
Equity share capital
85
85
85
85
85
85
Preference Capital
-
-
-
-
-
-
Reserves& surplus
1,922
1,905
1,744
1,611
1,509
1,529
Shareholders funds
2,007
1,990
1,829
1,696
1,594
1,614
Minority Interest
Total loans
4
4
3
2
2
2
Other long-term liabilities
5
5
5
-
-
-
Long-term provisions
236
242
273
291
291
291
Deferred tax liability
(87)
(92)
(83)
(89)
(89)
(89)
Total liabilities
2,165
2,148
2,026
1,900
1,798
1,818
APPLICATION OF FUNDS
Gross block
274
323
467
725
925
1,125
Less: Acc. depreciation
227
247
272
297
334
379
Net block
47
76
195
428
591
746
Capital work-in-progress
44
44
44
44
44
44
Goodwill
42
42
-
-
-
-
Other non-current assets
17
14
-
-
-
-
Long-term loans and adv.
195
238
307
313
343
379
Investments
55
10
0
0
0
0
Current assets
2,602
2,614
2,587
2,172
1,960
1,907
Cash
2,067
2,042
1,911
1,348
1,060
914
Loans & advances
134
238
122
123
135
149
Other
401
335
554
701
765
844
Current liabilities
836
889
1,107
1,058
1,140
1,258
Net current assets
1,765
1,725
1,480
1,115
820
649
Mis. Exp. not written off
-
-
-
-
-
-
Total Assets
2,165
2,148
2,026
1,900
1,798
1,818
November 9, 2016
9
Glaxo Pharma | 2QFY2017 Result Update
Cash flow statement
Y/E March (` cr)
CY2012 CY2013 FY2015 FY2016 FY2017E FY2018E
Profit before tax and exceptional
844
711
756
582
579
790
Depreciation
18
20
25
25
37
45
(Inc)/Dec in working capital
(25)
15
114
(197)
7
25
Direct taxes paid
318
230
279
203
185
275
Cash Flow from Operations
519
517
616
207
438
585
(Inc.)/Dec.in fixed assets
(28)
(49)
(144)
(258)
(200)
(200)
(Inc.)/Dec. in investments
(57)
(45)
(10)
-
-
-
Cash Flow from Investing
(85)
(93)
(154)
(258)
(200)
(200)
Issue of equity
-
-
-
-
-
-
Inc./(Dec.) in loans
-
-
-
-
-
-
Dividend paid (Incl. Tax)
(491)
(495)
(624)
(495)
(495)
(495)
Others
110
47
32
(16)
(30)
(35)
Cash Flow from Financing
(381)
(448)
(593)
(512)
(525)
(531)
Inc./(Dec.) in cash
52
(25)
(131)
(563)
(288)
(146)
Opening cash balances
2,014
2,067
2,042
1,911
1,348
1,060
Closing cash balances
2,067
2,042
1,911
1,348
1,060
914
November 9, 2016
10
Glaxo Pharma | 2QFY2017 Result Update
Key ratio
Y/E March
CY2012
CY2013
FY2015
FY2016
FY2017E
FY2018E
Valuation Ratio (x)
P/E (on FDEPS)
35.0
49.6
45.2
61.5
58.5
44.7
P/CEPS
42.3
45.9
45.9
57.3
53.5
41.1
P/BV
11.5
11.6
12.6
13.6
14.4
14.3
Dividend yield (%)
1.8
1.8
1.8
1.8
1.8
1.8
EV/Sales
8.0
8.3
6.5
7.9
7.3
6.7
EV/EBITDA
27.6
41.7
36.3
48.0
47.4
32.4
EV / Total Assets
9.7
9.8
10.4
11.4
12.2
12.2
Per Share Data (`)
EPS (Basic)
77.6
54.8
60.1
44.2
46.5
60.8
EPS (fully diluted)
77.6
54.8
60.1
44.2
46.5
60.8
Cash EPS
64.2
59.2
59.3
47.4
50.8
66.1
DPS
50.0
50.0
50.0
50.0
50.0
50.0
Book Value
236.9
234.9
215.9
200.2
188.2
190.5
Returns (%)
RoCE (Pre-tax)
34.7
22.4
26.7
21.7
23.1
35.3
Angel ROIC (Pre-tax)
-
-
-
-
-
-
RoE
33.3
23.2
26.7
21.2
23.9
32.1
Turnover ratios (x)
Asset Turnover (Gross Block)
9.7
8.6
8.4
4.6
3.7
3.3
Inventory / Sales (days)
43
48
40
59
55
47
Receivables (days)
14
15
11
15
15
13
Payables (days)
58
54
55
77
74
78
WC cycle (ex-cash) (days)
74
79
69
99
104
103
Solvency ratios (x)
Net debt to equity
(1.0)
(1.0)
(1.0)
(0.8)
(0.7)
(0.6)
Net debt to EBITDA
(2.7)
(4.0)
(3.3)
(3.0)
(2.3)
(1.3)
Interest Coverage (EBIT / Int.)
-
-
-
-
-
-
November 9, 2016
11
Glaxo Pharma | 2QFY2017 Result Update
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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Disclosure of Interest Statement
Glaxo Pharma
1. Financial interest of research analyst or Angel or his Associate or his relative
No
2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives
No
3. Served as an officer, director or employee of the company covered under Research
No
4. Broking relationship with company covered under Research
No
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)
November 9, 2016
12