Published on 8/06/2019 10:56:19 AM | Source: Motilal Oswal Securities Ltd

Neutral GlaxoSmithKline Ltd For The Target Rs.1,350 - Motilal Oswal

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Strategy reset working, but valuations largely capturing benefits

* Focus on product rationalization/operational efficiency reaping results:

Sales came in flat YoY at INR7.5b (our estimate: INR7.9b). Gross margin (GM) expanded 120bp YoY (+580bp QoQ) to 59.4%, led by a superior product mix. EBITDA margin improved ~110bp YoY to 21.8% on account of a better GM and lower other expenses (-200bp YoY/ -380bp QoQ), partly offset by increased employee cost (+190bp YoY to 19.5%). Consequently, EBITDA grew ~5% YoY to INR1.6b (our estimate: INR1.4b). Other income includes liabilities written back to the tune of INR231m. Adjusting for the same, PAT stood at INR1.2b (our estimate: INR961m).

* FY19 performance:

Sales/EBITDA/PAT grew 8%/19%/25% YoY to INR31.2b/INR6b/INR4.1b.

* Top 25 brands drive growth:

GLXO’s secondary sales grew 6.8% YoY in the quarter. Among the top brands, Augmentin/Betnovate C/Eltroxin/T-Bact delivered growth of 14%/31%/21%/36% YoY, while other brands witnessed marginally declining/stable sales. Among categories, Vaccines (+23%) injected vigor to growth, followed by Hormones/Derma (+11%/10% YoY). However, Anti-infectives/Pain categories delivered muted growth of 7%/3.8% YoY.

* Valuation view:

We maintain our estimates for FY20/21, factoring in moderate revenue growth on account of portfolio rationalization and the increased share of relatively high-margin products in the portfolio. We continue valuing GLXO at 43x 12M forward earnings to arrive at a target price of INR1,350 (prior: 1,309). While improved profitability may drive a 16% earnings CAGR over FY19-21, valuations provide limited upside from current levels. We, thus, maintain our Neutral rating on the stock.


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