3QFY2016 Result Update | Pharmaceutical

February 18, 2016

GlaxoSmithKline Pharma

NEUTRAL

CMP

`3,195

Performance Highlights

Target Price

Y/E Mar (` cr)

3QFY2016 2QFY2016

% chg (qoq) 3QFY2015

% chg (yoy)

Investment Period

Net Sales

729

692

5.3

646

12.8

Other income

(15.6)

94.3

Stock Info

Gross profit

387

390

(0.9)

360

7.6

Sector

Pharmaceutical

Operating profit

103

121

(14.9)

110

(6.6)

Market Cap (` cr)

27,061

Adj. PAT

101

(18.9)

50.1

Net Debt (` cr)

(1,631)

Source: Company, Angel Research

Beta

0.37

52 Week High / Low

3,825/2,965

For 3QFY2016, GlaxoSmithKline Pharmaceuticals (GSK Pharma) posted a

Avg. Daily Volume

2,435

disappointing operating performance. For the quarter, the company posted sales

Face Value (`)

of `729cr (V/s `730cr expected), a growth of 12.8% yoy. On the operating front,

BSE Sensex

23,382

the company posted a gross margin of 53.1% V/s 55.6% in the corresponding

period of the previous year. The OPM came in at 14.1% V/s 17.0% during the

Nifty

7,108

corresponding period of previous year, mainly owing to lower gross margin on a

Reuters Code

GLAX.BO

yoy basis. Adj. net profit came in at `82cr V/s `55cr in 3QFY2015, a yoy growth

Bloomberg Code

GLXO@IN

of 50.1%. We remain Neutral on the stock.

Results below our expectations: For 3QFY2016, the company posted a

Shareholding Pattern (%)

disappointing operating performance. For the quarter, the company posted sales

Promoters

75.0

of `729cr (V/s `730cr expected), a growth of 12.8% yoy. On the operating front,

MF / Banks / Indian Fls

10.3

the company posted a gross margin of 53.1% V/s 55.6% in the corresponding

FII / NRIs / OCBs

2.5

period of the previous year. The OPM came in at 14.1% V/s 17.0% during the

Indian Public / Others

12.2

corresponding period of previous year, mainly owing to lower gross margin on a

yoy basis. This lead the Adj. net profit came in at `82cr V/s `55cr in 3QFY2015,

a yoy growth of 50.1%.

Abs. (%)

3m 1yr

3yr

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

Sensex

(9.6)

(19.7)

20.1

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

Glaxo

2.6

(1.5)

52.5

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

CAGR of 9.8% to `3,158cr and EPS to register a mere CAGR of 6.6% to `68.3

over FY2015-17E. We remain Neutral on the stock.

3-year price chart

4,000

Key financials (Consolidated)

Y/E Mar (` cr)

CY2013

FY2015*

FY2016E

FY2017E

3,500

3,000

Net sales

2,538

3,272

2,870

3,158

2,500

% chg

(3.2)

28.9

(12.3)

10.0

2,000

Net profit

464

509

504

579

1,500

% chg

(29.4)

9.8

(1.1)

14.9

EPS (`)

54.8

60.1

59.5

68.3

EBITDA (%)

19.9

17.8

20.0

22.1

Source: Company, Angel Research

P/E (x)

58.3

53.1

53.7

46.7

RoE (%)

23.2

26.7

28.5

34.3

RoCE (%)

22.4

26.7

26.8

33.7

P/BV (x)

13.6

14.8

15.8

16.3

Sarabjit Kour Nangra

EV/Sales (x)

9.9

7.7

8.8

8.1

+91 22 39357800 Ext: 6806

EV/EBITDA (x)

49.7

43.2

44.1

36.6

[email protected]

Source: Company, Angel Research; Note: CMP as of February 17, 2016, * 15 months numbers

Please refer to important disclosures at the end of this report

Glaxo | 3QFY2016 Result Update

Exhibit 1: 3QFY2016 - Standalone performance

Y/E March (` cr)

3QFY2016 2QFY2016

% chg (qoq) 3QFY2015

% chg (yoy) 9MFY2016 9MFY2015

% chg

Net Sales

729

692

5.3

646

12.8

2,042

1,994

2.4

Other income

(15.6)

94.3

119

143

(16.6)

Total Income

762

731

4.2

663

14.9

2,162

2,137

1.2

Gross profit

387

390

(0.9)

360

7.6

1,119

1,038

7.8

Gross margin

53.1

56.4

55.6

54.8

52.1

Operating profit

103

121

(14.9)

110

(6.6)

327

364

(10.2)

Operating margin (%)

14.1

17.4

17.0

16.0

18.3

Interest

Depreciation & Amortisation

46.5

33.5

22.4

PBT & Exceptional Items

128

155

(17.2)

121

5.8

428

492

(13.1)

Less : Exceptional Items

(3)

(8)

(21)

(14)

Profit before tax

125

147

(15.0)

100

24.3

415

492

(15.8)

Provision for taxation

(11.7)

(18.5)

145

169

(14.0)

Reported PAT

(16.8)

76.4

269

324

(16.8)

Adj. Net profit

101

(18.9)

50.1

278

324

(14.1)

EPS (`)

9.7

11.9

6.5

32.8

38.2

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

Exhibit 2: 3QFY2016 - Actual vs Angel estimates

(` cr)

Actual

Estimates

Variation (%)

Net sales

729

730

(0.2)

Other income

(23.3)

Operating profit

103

131

(21.7)

Tax

(32.3)

Adj. net profit

103

(20.2)

Source: Company, Angel Research

Revenue grew by 12.8%

For 3QFY2016, the company posted a disappointing operating performance.

Sales came in at `729cr (V/s `730cr expected), a growth of 12.8% yoy.

February 18, 2016

Glaxo | 3QFY2016 Result Update

Exhibit 3: Sales trend

800

40.0

729

35.0

692

30.0

700

646

25.0

622

613

20.0

600

15.0

10.0

5.0

500

0.0

(5.0)

400

(10.0)

4QFY2015

5QFY2015

1QFY2016

2QFY2016

3QFY2016

Sales

Growth (YoY)

Source: Company, Angel Research, Note- Financial year changed to March from Dec in 2015

OPM comes in lower at 14.1%

On the operating front, the gross margins for the quarter came in at 53.1% V/s

55.6% in 3QFY2015. The OPM came in at 14.1% V/s 17.0% in 3QFY2015,

mainly owing to lower GPM on a yoy basis. This is against our expectation of

18.1%.

Exhibit 4: OPM trend

25.0

19.4

20.0

17.4

17.0

16.7

15.0

14.1

10.0

4QFY2015

5QFY2015

1QFY2016

2QFY2016

3QFY2016

Source: Company, Angel Research, Note- Financial year changed to March from Dec in 2015

Net profit lower than estimated

The reported net profit came in at `80cr V/s `45cr in 3QFY2015. However the

Adj. net profit came in at `82cr V/s `55cr in 3QFY2015, a yoy growth of 50.1%.

February 18, 2016

Glaxo | 3QFY2016 Result Update

Recommendation rationale

Renewed focus on the Indian market; CY2013 & FY2015 muted on back of DPCO

2013: GSK Pharma 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. Specialty segment’s contribution to sales has

reached 23% (as of 2013). The segment grew by 9.0% yoy in CY2013. 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 (GSK), London, UK, entered into three inter-

conditional agreements with Novartis AG (Novartis), Basel, Switzerland. In one

such agreement GSK agreed to acquire Novartis’s Vaccines business (excluding

influenza vaccine) and manufacturing capabilities and facilities from Novartis, and

in the second agreement, GSK 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 2nd, 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 FY2015-17E, we expect the domestic formulation

business of the company to grow at a CAGR of 8.0%.

Significant capex plans ahead indicate revival in growth: Global pharmaceutical

major GSK announced an `864cr investment in India to set up a medicine

manufacturing unit. The new facility will substantially increase GSK’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.

February 18, 2016

Glaxo | 3QFY2016 Result Update

Outlook and valuation:

GSK Pharma 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 had

announced to increase stake in it through a voluntary open offer, after which the

parent company holds 75.0% stake in its 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

9.8% to

`3,158cr and EPS to register a CAGR of

6.6% to

`68.3 over

FY2015-17E. At current levels, the stock is trading at 53.7x and 46.7x its FY2016E

and FY2017E earnings, respectively. We remain Neutral on the stock.

Exhibit 6: Key assumptions

FY2016E

FY2017E

Sales growth (%)

9.6

10.0

Growth in employee expenses (%)

10.0

Operating margin (%)

20.0

22.1

Capex (` cr)

200

Source: Company, Angel Research

Exhibit 7: One-year forward PE

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

February 18, 2016

Glaxo | 3QFY2016 Result Update

Exhibit 8: Recommendation summary

Company

Reco

CMP Tgt. price Upside

FY2017E

FY15-17E

FY2017E

(`)

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

Alembic Pharma

Neutral

609

21.2

2.9

15.0

38.2

31.3

31.2

Aurobindo Pharma Buy

663

856

29.1

15.5

2.5

11.0

15.6

23.5

30.2

Cadila Healthcare

Accumulate

314

352

12.1

17.8

2.7

12.2

24.6

25.2

29.0

Cipla

Neutral

520

636

22.3

18.0

2.4

12.8

21.4

17.1

16.8

Dr Reddy's

Neutral

2,961

3,933

32.8

16.6

2.5

10.7

17.2

19.1

20.4

Dishman Pharma

Neutral

313

15.7

1.7

7.8

15.9

9.4

11.0

GSK Pharma*

Neutral

3,195

46.7

8.1

36.6

6.6

33.7

34.3

Indoco Remedies

Neutral

260

19.1

2.1

11.4

23.0

19.7

Ipca labs

Buy

599

900

50.3

21.4

2.2

11.7

17.9

11.8

14.0

Lupin

Neutral

1,731

25.3

4.4

16.1

13.1

29.6

24.7

Sanofi India*

Neutral

4,176

27.6

3.6

17.1

33.1

27.9

25.5

Sun Pharma

Accumulate

855

950

11.2

31.8

5.6

18.3

8.4

15.8

16.6

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

February 18, 2016

Glaxo | 3QFY2016 Result Update

Company Background

GlaxoSmithKline Pharmaceuticals 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 Pharma 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.

February 18, 2016

Glaxo | 3QFY2016 Result Update

Profit & loss statement

Y/E March (` cr)

CY2011

CY2012

CY2013

FY2015

FY2016E

FY2017E

Gross sales

2,433

2,692

2,589

3,328

2,929

3,222

Less: Excise duty

Net sales

2,378

2,621

2,538

3,272

2,870

3,158

Other operating income

Total operating income

2,379

2,651

2,563

3,305

2,876

3,165

% chg

10.3

11.4

(3.3)

28.9

(13.0)

10.0

Total expenditure

1,635

1,862

2,034

2,690

2,297

2,461

Net raw materials

919

1,104

1,164

1,510

1,263

1,389

Other Mfg costs

122

115

107

Personnel

279

296

362

493

432

476

Other

314

369

420

572

502

489

EBITDA

743

759

504

582

574

696

% chg

(2.0)

2.1

(33.6)

15.5

(1.4)

21.3

(% of Net Sales)

31.2

29.0

19.9

17.8

20.0

22.1

Depreciation& amortisation

EBIT

723

741

484

557

527

636

% chg

(2.5)

2.6

(34.7)

15.0

(5.3)

20.6

(% of Net Sales)

30.4

28.3

19.1

17.0

18.4

20.1

Interest & other charges

Other income

182

175

177

200

(% of PBT)

Share in profit of Associates

Recurring PBT

905

945

685

789

733

843

% chg

3.9

4.4

(27.5)

15.1

(7.0)

14.9

Extraordinary expense/(Inc.)

301

101

(26)

PBT (reported)

605

844

711

756

733

843

Tax

176

318

230

279

229

264

(% of PBT)

29.1

37.7

32.3

36.9

31.3

PAT (reported)

429

526

482

477

504

579

Add: Share of earnings of asso.

Less: Minority interest (MI)

Prior period items

Exceptional items

PAT after MI (reported)

429

526

482

477

504

579

ADJ. PAT

587

657

464

509

504

579

% chg

1.6

12.0

(29.4)

9.8

(1.1)

14.9

(% of Net Sales)

24.7

25.1

18.3

15.6

17.5

18.3

Basic EPS (`)

Fully diluted EPS (`)

% chg

1.6

12.0

(29.4)

9.8

(1.1)

14.9

February 18, 2016

Glaxo | 3QFY2016 Result Update

Balance Sheet

Y/E March (` cr)

CY2011

CY2012

CY2013E

FY2015

FY2016E

FY2017E

SOURCES OF FUNDS

Equity share capital

Preference Capital

Reserves& surplus

1,851

1,922

1,905

1,744

1,624

1,578

Shareholders funds

1,936

2,007

1,990

1,829

1,708

1,663

Minority Interest

Total loans

Other long-term liabilities

Long-term provisions

225

236

242

273

Deferred tax liability

(62)

(87)

(92)

(83)

Total liabilities

2,108

2,165

2,148

2,026

1,909

1,864

APPLICATION OF FUNDS

Gross block

274

323

467

667

867

Less: Acc. depreciation

217

227

247

272

319

379

Net block

195

348

487

Capital work-in-progress

Goodwill

Other non-current assets

Long-term loans and adv.

157

195

238

307

270

297

Investments

112

Current assets

2,548

2,602

2,614

2,587

2,596

2,520

Cash

2,014

2,067

2,042

1,911

1,735

1,573

Loans & advances

134

238

122

287

316

Other

448

401

335

554

574

632

Current liabilities

860

836

889

1,107

1,349

1,484

Net current assets

1,688

1,765

1,725

1,480

1,247

1,036

Mis. Exp. not written off

Total Assets

2,108

2,165

2,148

2,026

1,909

1,864

February 18, 2016

Glaxo | 3QFY2016 Result Update

Cash flow statement

Y/E March (` cr)

CY2011 CY2012 CY2013 FY2015 FY2016E FY2017E

Profit before tax and exceptional

605

844

711

756

733

843

Depreciation

(Inc)/Dec in working capital

(205)

(25)

114

Direct taxes paid

188

318

230

279

229

264

Cash Flow from Operations

232

519

517

616

608

688

(Inc.)/Dec.in fixed assets

(28)

(49)

(144)

(200)

(Inc.)/Dec. in investments

(6)

(57)

(45)

(10)

Cash Flow from Investing

(85)

(93)

(154)

(200)

Issue of equity

Inc./(Dec.) in loans

(1)

Dividend paid (Incl. Tax)

(444)

(491)

(495)

(624)

Others

191

110

(26)

Cash Flow from Financing

(254)

(381)

(448)

(593)

(584)

(650)

Inc./(Dec.) in cash

(25)

(131)

(176)

(162)

Opening cash balances

2,003

2,014

2,067

2,042

1,911

1,735

Closing cash balances

2,014

2,067

2,042

1,911

1,735

1,573

February 18, 2016

Glaxo | 3QFY2016 Result Update

Key ratio

Y/E March

CY2011

CY2012

CY2013

FY2015

FY2016E

FY2017E

Valuation Ratio (x)

P/E (on FDEPS)

46.1

41.2

58.3

53.1

53.7

46.7

P/CEPS

60.3

49.8

54.0

53.9

49.2

42.3

P/BV

14.0

13.5

13.6

14.8

15.8

16.3

Dividend yield (%)

1.4

1.6

EV/Sales

10.5

9.5

9.9

7.7

8.8

8.1

EV/EBITDA

33.7

32.9

49.7

43.2

44.1

36.6

EV / Total Assets

11.9

11.5

11.6

12.4

13.3

13.7

Per Share Data (`)

EPS (Basic)

69.3

77.6

54.8

60.1

59.5

68.3

EPS (fully diluted)

69.3

77.6

54.8

60.1

59.5

68.3

Cash EPS

53.0

64.2

59.2

59.3

65.0

75.5

DPS

45.0

50.0

51.0

Book Value

228.5

236.9

234.9

215.9

201.7

196.3

Returns (%)

RoCE (Pre-tax)

36.1

34.7

22.4

26.7

26.8

33.7

Angel ROIC (Pre-tax)

RoE

30.2

33.3

23.2

26.7

28.5

34.3

Turnover ratios (x)

Asset Turnover (Gross Block)

8.0

9.7

8.6

8.4

5.1

4.1

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

104

Solvency ratios (x)

Net debt to equity

(1.0)

(0.9)

Net debt to EBITDA

(2.7)

(4.0)

(3.3)

(3.0)

(2.2)

Interest Coverage (EBIT / Int.)

February 18, 2016

Glaxo | 3QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.

Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot

testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.

While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be

regulatory, compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,

redistributed or passed on, directly or indirectly.

Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from

or in connection with the use of this information.

Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the

latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may

have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

Glaxo Pharma

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

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)

February 18, 2016