Weak quarter impacted by COVID-19
GlaxoSmithKline Pharmaceuticals Limited’s (GSKP) Q1FY21 results were below our estimates on all fronts. Revenue declined 17.7% YoY to Rs6.5bn (I-Sec: Rs7.1bn), EBITDA margin declined 340bps YoY to 17.6% (I-Sec: 20.0%) and adjusted PAT declined 26.7% YoY to Rs791mn (I-Sec: Rs1.0bn). Weaker than expected performance was decline in top brands owing to lockdown caused by COVID-19. As GSKP’s focus is on acute therapies we expect pressure in the uncertain near term to sustain. GSKP’s exposure only to domestic formulations, strong balance sheet and strong brand equity augurs well for the company but current valuations seem fair, hence we maintain HOLD recommendation with a revised target price of Rs1,432/share (earlier: Rs1,453/share).
* Weak than anticipated performance: Revenue declined 17.7% during the quarter against our estimate of a 10.0% decline due to negligible sales of Zinetac (ranitidine) as well as impact from nationwide lockdown post COVID-19. Declining sales of low margin Zinetac (ranitidine) as well as lower raw material cost lifted gross margins by 370bps YoY but lower sales resulted in margin dropping 370bps QoQ. Employee cost rose 6.4% but other expenses declined 16.0% YoY to support EBITDA. As a percentage of sales employee cost and other expenses jumped 530bps and 40bps YoY respectively resulting in a contraction of 340bps in EBITDA margin. Company reported a gain of Rs427mn in the form of interest on income tax refund.
* Key products performance: As per AIOCD data the GSKP has reported decline of 15.4%. Betnovate, Betnovate N and Eltroxin have reported healthy YoY growth of 12.6%, 12.7% and 7.7% respectively for the quarter. However, Augmentin, Synflorix, Calpol, T-BACT, Ceftum and Betnesol have reported a YoY decline of 6.0%, 14.3%, 7.1%, 8.1%, 16.0% and 16.9% respectively. Infanrix Hexa continues its strong momentum with 34.9% YoY growth albeit on a smaller base. Company has stated that despite the challenging environment its market share has grown in 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 6.8% revenue and 11.9% PAT CAGR over FY20-FY22E driven by growth in power brands and key therapies like vaccines and VMN. Minimal capex requirement would aid cashflow generation of ~Rs13bn over the next two years.
* Valuations and risks: We reduce our revenue and earnings estimates for FY21EFY22E by 1-2% and 1-4% to factor in the weaker than anticipated quarter performance impacted due to COVID-19. We maintain HOLD with a revised target price of Rs1,432/share based on 40xFY22E earnings (earlier: Rs1,453/share). Key downside risks: addition of key drugs in National List of Essential Medicines (NLEM), product concentration and government intervention. Key upside risks: better than expected performance in key products and new significant product launches
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