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Focus on Rx growth; vaccine continue to decline

GSK Pharma reported revenue of Rs9,2bn in Q2FY23 de-grew by 2% YoY, and grew strong on QoQ 23%. Lower staff cost offset by investment in core brands which has driven the other expenses in Q2. EBITDA for the quarter came in at Rs2.6bn with margin expansion of 800bps QoQ (flat QoQ) at 28%. Adj. PAT for the quarter stood at Rs1.9bn up by 2% YoY and 66% QoQ. During the quarter the company reported strong performance in general medicines and specialty business, gaining market share, while vaccine continue to decline. We expect the EBITDA margins to expand beyond the Cx transaction. We maintain our BUY rating, with a revised target price of Rs1,600 (38x on Sep’24E EPS).

Reflect growth momentum across segment

GSK grew 9% in General Medicines and Specialty business, management believes on the growth momentum in the coming quarters and continue to focus on its key brands to drive sustainable profitable growth. Pharma segment accounts for ~75% of total revenues for GSK. Vaccines business has maintained its leadership in the self-pay segment while the overall vaccines market continues to be in decline.

Better product mix led margin expansion

Gross margin stood steady at 60%, Staff cost declined 11% YoY and 6% QoQ to Rs1.4bn. The other expenses rose 18% YoY and down by 3% QoQ, this rise in other expenses reflect higher core brand investments. EBITDA for the quarter came in at Rs2.6bn with margin expansion of 800bps QoQ (flat QoQ) at 28%. The Vx segment is also expected to post higher growth, with Shingrix launch; however, the margin contribution would be lower, given the traded nature of the Vx portfolio.

Sale of consumer brands

After sale/transfer of Iodex and Ostocalcium brands to parent GSK Asia Pvt. Ltd. in March 2022, GSK Pharma received consideration of Rs 16.5 bn (cash per share of Rs 97) which has boosted its cash reserves to Rs 30.4 bn at end of March 2022 (cash per share of Rs 179). Investors have been rewarded with special dividend of Rs 60 per share along with final dividend of Rs 30 per share for FY22E. Total dividend of Rs 90 per share works out to dividend yield of 6%.

Valuation and risks

GSK’s strategy is to drive growth by following the three pillar approach: Grow, Build and Shred. The top-20 focus brands continue to be key growth drivers. Building new specialty brands (parent’s pipeline) would enable room for focused growth. The recent launch pipeline holds Shingrix, Trelegy, indication expansion for Nucala and Fluarix Tetra, followed by oncology pipeline. Core focus on improving cost efficiency to be earnings accretive. We value the stock at 38x on Sep’24E EPS and arrive at a TP of Rs1,600. At CMP of Rs1,328, the stock trades at 38x FY23E EPS of Rs35 and 33x FY24E EPS of Rs40.1. Maintaining a BUY.

Valuations

We like GSK in our lead pack, and value the stock at 38x on Sep’24E EPS and arrive at a TP of Rs1,600. At CMP of Rs1,328, the stock trades at 38x FY23E EPS of Rs35 and 33x FY24E EPS of Rs40.1. Maintaining a BUY.

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