1QFY2017 Result Update | Pharmaceutical

August 4, 2016

GlaxoSmithKline Pharmaceuticals

NEUTRAL

CMP

`3,139

Performance Highlights

Target Price

Y/E Mar (` cr)

1QFY2017 4QFY2016

% chg (QoQ) 1QFY2016

% chg (YoY)

Investment Period

Net Sales

685

686

(0.1)

622

10.2

Stock Info

Other income

42.2

(4.0)

Sector

Pharmaceutical

Gross profit

371

377

(1.6)

342

8.5

Market Cap (` cr)

27,015

Operating profit

122

(42.4)

104

(32.5)

Net Debt (` cr)

(1,055)

Adj. PAT

(25.5)

(25.2)

Beta

0.43

Source: Company, Angel Research

52 Week High / Low

3,850/3,036

Avg. Daily Volume

1,791

For 1QFY2017, sales stood at `685cr V/s `700cr expected and V/s `622cr in

Face Value (`)

1QFY2016, a yoy growth of 10.2%. The sales growth has been impacted on

BSE Sensex

27,982

back of the pricing cuts implemented by the government. On the operating front,

Nifty

8,623

the OPM came in at 10.2% V/s 16.7% in 1QFY2016 and V/s 17.0% expected.

Reuters Code

GLAX.BO

The company’s OPM was impacted by other expenses, which grew by 40.5%

Bloomberg Code

GLXO@IN

yoy. Thus, the company posted an Adj. net profit of `71cr V/s `95cr in

1QFY2016, a yoy de-growth of 25.2%. We maintain our Neutral rating.

Shareholding Pattern (%)

Results below expectations: For 1QFY2017, sales stood at `685cr V/s `700cr

Promoters

75.0

expected and V/s `622cr in 1QFY2016, a yoy growth of 10.2%. The sales

MF / Banks / Indian Fls

10.4

growth has been impacted on back of the pricing cuts implemented by the

FII / NRIs / OCBs

2.6

government. On the operating front, the OPM came in at 10.2% V/s 16.7% in

Indian Public / Others

12.0

1QFY2016 and V/s 17.0% expected. The company’s OPM was impacted by

other expenses, which grew by 40.5% yoy. Thus, the company posted an Adj. net

profit of `71cr V/s `95cr in 1QFY2016, a yoy de-growth of 25.2%..

Abs. (%)

3m 1yr

3yr

Sensex

10.0

(0.5)

46.0

Outlook and valuation: The company has a strong balance sheet with cash of

Glaxo

(13.1)

(9.1)

40.4

~`2,000cr, which could be used for future acquisitions or higher dividend pay

outs. On the operational front, we expect the company’s net sales to post a

CAGR of 13.4% to `3,527cr and EPS to register a mere CAGR of 15.9% to `59.4

3-year price chart

over FY2016-18E. We remain Neutral on the stock.

4,000

Key financials (Consolidated)

3,500

Y/E Mar (` cr)

FY2015*

FY2016

FY2017E

FY2018E

3,000

Net sales

3,272

2,741

3,200

3,527

2,500

% chg

28.9

(16.2)

16.7

10.2

Net profit

509

374

439

503

2,000

% chg

9.8

(26.5)

17.3

14.6

1,500

EPS (`)

60.1

44.2

51.8

59.4

EBITDA (%)

17.8

16.5

16.6

18.8

P/E (x)

52.2

71.1

60.6

52.9

Source: Company, Angel Research

RoE (%)

26.7

21.2

26.3

30.6

RoCE (%)

26.7

21.7

26.3

33.5

P/BV (x)

14.5

15.7

16.2

16.1

Sarabjit Kour Nangra

EV/Sales (x)

7.5

9.2

8.0

7.3

+91 22 39357800 Ext: 6806

EV/EBITDA (x)

42.4

55.9

48.1

38.7

[email protected]

Source: Company, Angel Research; Note: CMP as of August 3, 2016; * 15 months numbers

Please refer to important disclosures at the end of this report

Glaxo Pharma | 1QFY2017 Result Update

Exhibit 1: 1QFY2017 - Standalone performance

Y/E March (` cr)

1QFY2017

4QFY2016

% chg (QoQ) 1QFY2016

% chg (YoY)

FY2016

FY2015

% chg

Net Sales

685

686

(0.1)

622

10.2

2,741

3,272

(16.2)

Other income

42.2

(4.0)

153

233

(34.5)

Total Income

729

717

1.7

668

9.2

2,894

3,505

(17.4)

Gross profit

371

377

(1.6)

342

8.5

1,503

1,748

(14.0)

Gross margin

54.1

55.0

54.8

53.4

Operating profit

122

(42.4)

104

(32.5)

452

599

(24.6)

Operating margin (%)

10.2

17.8

16.7

16.5

18.3

Interest

Depreciation & Amortization

(20.1)

7.4

(0.9)

PBT & Exceptional Items

109

146

(25.5)

145

(24.8)

579

806

(28.1)

Less : Exceptional Items

(2)

(52)

Profit before tax

111

162

(31.8)

143

(22.5)

582

754

(22.8)

Provision for taxation

(31.7)

(21.3)

203

277

(26.8)

Reported PAT

106

(31.8)

(23.1)

377

476

(20.9)

Adj. Net profit

(25.5)

(25.2)

375

509

(26.3)

EPS (`)

8.4

11.3

11.2

44.3

60.1

Source: Company, Angel Research, Note- Full year numbers are consolidated numbers

Exhibit 2: 1QFY2017 - Actual Vs Angel estimates

(` cr)

Actual

Estimates

Variation (%)

Net sales

685

700

(2.1)

Other income

0.0

Operating profit

119

(41.0)

Tax

(28.1)

Adj. net profit

102

(30.4)

Source: Company, Angel Research

Revenue grew by 10.2%

Sales grew 10.2% yoy to `685cr (V/s `700cr expected). Total sales growth includes

~4% yoy growth from the vaccines asset sale agreement with Novartis India. The

impact of new DPCO list, FDC ban and WPI deflation would be ~3% on the

company’s annual sales or possibly lower.

August 4, 2016

Glaxo Pharma | 1QFY2017 Result Update

Exhibit 3: Sales trend

800

40.0

729

35.0

692

30.0

686

685

700

25.0

622

20.0

600

15.0

10.0

5.0

500

0.0

(5.0)

400

(10.0)

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Sales

Growth (YoY)

Source: Company, Angel Research

OPM comes in lower on a yoy basis at 10.2%

On the operating front, the gross margin came in at 54.1% V/s 55.0% in

1QFY2016. The OPM came in lower at 10.2% V/s 16.7% in 1QFY2016 and V/s

our expectation of 17.0%, mainly on back of a yoy growth of 40.5% in other

expenses.

Exhibit 4: OPM trend

24.0

19.0

17.4

17.8

16.7

14.1

14.0

10.2

9.0

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Source: Company, Angel Research

Net profit lower than estimated

The reported net profit came in at `72cr V/s `93cr in 1QFY2017. The Adj. net

profit came in at `71cr V/s `95cr in 1QFY2017, ie a yoy de-growth of 25.2% and

lower than our expectation of `102cr.

August 4, 2016

Glaxo Pharma | 1QFY2017 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 13.4%.

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.

August 4, 2016

Glaxo Pharma | 1QFY2017 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

13.4% to `3,527cr and EPS to register a CAGR of 15.9% to `59.4 over

FY2016-18E. At current levels, the stock is trading at 60.6x and 52.9x its FY2017E

and FY2018E earnings, respectively. We remain Neutral on the stock.

Exhibit 6: Key assumptions

FY2017E

FY2018E

Sales growth (%)

16.7

10.2

Growth in employee expenses (%)

16.2

10.0

Operating margin (%)

16.6

18.8

Capex (` cr)

200

Source: Company, Angel Research

Exhibit 7: One-year forward PE

6,000

5,500

5,000

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

Price

18x

30x

42x

54x

Source: Company, Angel Research

August 4, 2016

Glaxo Pharma | 1QFY2017 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

622

20.5

2.7

12.8

(10.8)

27.5

25.3

Aurobindo Pharma Buy

749

877

17.2

15.8

2.6

11.0

18.1

22.5

26.1

Cadila Healthcare

Buy

347

399

15.3

17.4

2.6

11.8

15.8

24.3

26.6

Cipla

Neutral

529

19.5

2.5

13.4

20.4

13.5

15.2

Dr Reddy's

Neutral

2,942

18.6

2.7

10.9

6.9

18.1

17.1

Dishman Pharma

Neutral

164

15.8

1.7

8.0

(1.1)

9.6

10.2

GSK Pharma*

Neutral

3,139

52.9

6.8

36.2

15.9

35.8

31.8

Indoco Remedies

Sell

313

225

(19.6)

20.1

2.3

12.8

31.5

19.1

19.2

Ipca labs

Buy

508

613

20.6

25.8

1.8

11.7

17.9

11.8

14.9

Lupin

Accumulate

1,680

1,809

7.7

24.2

4.0

14.9

17.2

24.4

20.9

Sanofi India

Neutral

4,545

26.9

3.4

19.5

21.2

24.9

28.4

Sun Pharma

Buy

838

944

12.6

25.6

5.2

16.7

22.0

33.1

18.9

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

August 4, 2016

Glaxo Pharma | 1QFY2017 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.

August 4, 2016

Glaxo Pharma | 1QFY2017 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

3,272

3,599

Less: Excise duty

Net sales

2,621

2,538

3,272

2,741

3,200

3,527

Other operating income

Total operating income

2,651

2,563

3,305

2,768

3,227

3,554

% chg

11.4

(3.3)

28.9

(16.2)

16.6

10.1

Total expenditure

1,862

2,034

2,690

2,289

2,670

2,864

Net raw materials

1,104

1,164

1,510

1,233

1,504

1,587

Other Mfg costs

115

107

115

Personnel

296

362

493

443

515

568

Other

369

420

572

514

544

593

EBITDA

759

504

582

452

530

664

% chg

2.1

(33.6)

15.5

(22.4)

17.3

25.2

(% of Net Sales)

29.0

19.9

17.8

16.5

16.6

18.8

Depreciation& amortization

EBIT

741

484

557

427

493

619

% chg

2.6

(34.7)

15.0

(23.3)

15.5

25.5

(% of Net Sales)

28.3

19.1

17.0

15.6

15.4

17.5

Interest & other charges

Other income

175

177

200

125

(% of PBT)

Share in profit of Associates

Recurring PBT

945

685

789

579

646

771

% chg

4.4

(27.5)

15.1

(26.5)

11.4

19.5

Extraordinary expense/(Inc.)

101

(26)

(3)

PBT (reported)

844

711

756

582

646

771

Tax

318

230

279

203

207

268

(% of PBT)

37.7

32.3

36.9

34.8

32.0

34.8

PAT (reported)

526

482

477

377

439

503

Add: Share of earnings

of asso.

Less: Minority interest (MI)

Prior period items

Exceptional items

PAT after MI (reported)

526

482

477

377

439

503

ADJ. PAT

657

464

509

374

439

503

% chg

12.0

(29.4)

9.8

(26.5)

17.3

14.6

(% of Net Sales)

25.1

18.3

15.6

13.7

14.3

Basic EPS (`)

Fully diluted EPS (`)

% chg

12.0

(29.4)

9.8

(26.5)

17.3

14.6

August 4, 2016

Glaxo Pharma | 1QFY2017 Result Update

Balance Sheet

Y/E March (` cr)

CY2012

CY2013

FY2015

FY2016

FY2017E

FY2018E

SOURCES OF FUNDS

Equity share capital

Preference Capital

Reserves& surplus

1,922

1,905

1,744

1,611

1,555

1,562

Shareholders funds

2,007

1,990

1,829

1,696

1,640

1,647

Minority Interest

Total loans

Other long-term liabilities

Long-term provisions

236

242

273

291

Deferred tax liability

(87)

(92)

(83)

(89)

Total liabilities

2,165

2,148

2,026

1,900

1,844

1,851

APPLICATION OF FUNDS

Gross block

274

323

467

725

925

1,125

Less: Acc. depreciation

227

247

272

297

334

379

Net block

195

428

591

746

Capital work-in-progress

Goodwill

Other non-current assets

Long-term loans and adv.

195

238

307

313

366

403

Investments

Current assets

2,602

2,614

2,587

2,172

2,059

1,998

Cash

2,067

2,042

1,911

1,348

1,099

940

Loans & advances

134

238

122

123

144

159

Other

401

335

554

701

816

899

Current liabilities

836

889

1,107

1,058

1,216

1,340

Net current assets

1,765

1,725

1,480

1,115

843

658

Mis. Exp. not written off

Total Assets

2,165

2,148

2,026

1,900

1,844

1,851

August 4, 2016

Glaxo Pharma | 1QFY2017 Result Update

Cash flow statement

Y/E March (` cr)

CY2012 CY2013 FY2015 FY2016 FY2017E FY2018E

Profit before tax and exceptional

844

711

756

582

646

771

Depreciation

(Inc)/Dec in working capital

(25)

114

(197)

Direct taxes paid

318

230

279

203

207

268

Cash Flow from Operations

519

517

616

207

499

574

(Inc.)/Dec.in fixed assets

(28)

(49)

(144)

(258)

(200)

(Inc.)/Dec. in investments

(57)

(45)

(10)

Cash Flow from Investing

(85)

(93)

(154)

(258)

(200)

Issue of equity

Inc./(Dec.) in loans

Dividend paid (Incl. Tax)

(491)

(495)

(624)

(495)

Others

110

(16)

(52)

(38)

Cash Flow from Financing

(381)

(448)

(593)

(512)

(548)

(533)

Inc./(Dec.) in cash

(25)

(131)

(563)

(249)

(159)

Opening cash balances

2,014

2,067

2,042

1,911

1,348

1,099

Closing cash balances

2,067

2,042

1,911

1,348

1,099

940

August 4, 2016

Glaxo Pharma | 1QFY2017 Result Update

Key ratio

Y/E March

CY2012

CY2013

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

40.5

57.3

52.2

71.1

60.6

52.9

P/CEPS

48.9

53.0

66.2

55.9

48.5

P/BV

13.3

13.4

14.5

15.7

16.2

16.1

Dividend yield (%)

1.6

EV/Sales

9.4

9.7

7.5

9.2

8.0

7.3

EV/EBITDA

32.3

48.7

42.4

55.9

48.1

38.7

EV / Total Assets

11.3

11.4

12.2

13.3

13.8

13.9

Per Share Data (`)

EPS (Basic)

77.6

54.8

60.1

44.2

51.8

59.4

EPS (fully diluted)

77.6

54.8

60.1

44.2

51.8

59.4

Cash EPS

64.2

59.2

59.3

47.4

56.2

64.7

DPS

50.0

Book Value

236.9

234.9

215.9

200.2

193.6

194.4

Returns (%)

RoCE (Pre-tax)

34.7

22.4

26.7

21.7

26.3

33.5

Angel ROIC (Pre-tax)

RoE

33.3

23.2

26.7

21.2

26.3

30.6

Turnover ratios (x)

Asset Turnover (Gross Block)

9.7

8.6

8.4

4.6

3.9

3.5

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

101

104

Solvency ratios (x)

Net debt to equity

(1.0)

(0.8)

(0.7)

(0.6)

Net debt to EBITDA

(2.7)

(4.0)

(3.3)

(3.0)

(2.1)

(1.4)

Interest Coverage (EBIT / Int.)

August 4, 2016

Glaxo Pharma | 1QFY2017 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

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 4, 2016