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Nomralised performance

GlaxoSmithKline Pharmaceuticals Limited’s (GSKP) Q3FY21 results were inline with our estimates. Revenue grew 10.1% YoY to Rs8.6bn (I-Sec: Rs8.6bn), EBITDA margin improved 800bps YoY (+70bps QoQ) to 24.0% (I-Sec: 23.5%) while adjusted PAT grew 68.0% YoY to Rs1.5bn (I-Sec: Rs1.5bn). Healthy performance was led by recovery in its key brands and supported by recently launched products (Fluarix Tetra, Menveo and Nucala). We expect this trend in recovery in the acute therapies to continue in the coming quarters. GSKP’s exposure only to domestic formulations, strong balance sheet and strong brand equity augurs well. Considering the recent price correction making valuations attractive, we upgrade to ADD from HOLD with a revised target price of Rs1,565/share.

* Business normalises: Revenue grew 10.1% YoY (-2.5% QoQ) during the quarter as acute therapies witnessed recovery with easing of lockdown restrictions. Company’s current quarter performance on last year’s impacted base reflects normalised operations and we belive that the company is poised to grow with traction in key brands supported by healthy growth in recently launched products (Fluarix Tetra, Menveo and Nucala). Gross margin improved 110bps YoY (+80bps QoQ) due to product mix, better efficiency and operating leverage resulted in 70bps QoQ (+800bps YoY on a low base) improvement in EBITDA margin to 24.0%. Company has reversed some of the provision for Zinteac (ranitidine) and has recorded an exceptional income of Rs89mn during the quarter. Adjusted PAT grew 68.0% YoY.

* Key products performance: As per AIOCD data the GSKP has reported growth of 1.1%. T-Bact, Betnovate N and Betnovate C have reported healthy YoY growth of 23.8%, 27.0% and 12.6% respectively for the quarter. However, Augmentin, Synflorix, Calpol and Betnesol have reported a YoY decline of 3.9%, 3.7%, 4.3% and 12.5% respectively. Infanrix Hexa continues its strong momentum with 49.0% YoY growth. Fluarix Tetra and Menveo are tracking well with revenue of Rs6mn and Rs50mn respectively during the quarter.

* Outlook: FY21 estimates would optically appear lower due to Zinteac (ranitidine) sales in the base. However, we expect FY22 to report a strong growth both on revenue and earnings front. We expect 6.0% revenue and 11.0% PAT CAGR over FY20-FY23E driven by growth in power brands and key therapies like vaccines, respiratory and VMN. Minimal capex requirement would aid cashflow generation of ~Rs20bn over the next three years.

* Valuations and risks: We reduce our revenue and EPS estimates by 1-2% and 2.3% respectively for FY21E-FY23E to factor in current quarter’s performance and higher expenses. Recent price correction has made valuations attractive, hence, we upgrade to ADD from HOLD with a revised target price of Rs1,565/share based on 40xFY23E earnings (earlier: Rs1,511/share). Key downside risks: addition of key drugs in NLEM, product concentration and government intervention.

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