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Robust growth driven by key brands

GlaxoSmithKline Pharmaceuticals Limited’s (GSKP) Q2FY22 result was above our estimates. Revenue grew 14.8% YoY to Rs10.1bn (I-Sec: Rs8.3bn), EBITDA margin grew 410bps YoY (+820bps QoQ) to 27.4% (I-Sec: 18.6%) while reported PAT grew 167/68.7% YoY/QoQ to Rs2.0bn (I-Sec: Rs1.2bn). Robust growth in key brands with continuous traction from newly launched products (Fluarix Tetra and Menveo) have supported the performance. Growth is also supported by favourable seasonality benefit. Sequential improvement in margins were mainly driven by operational leverage. Pure play domestic formulator, strong balance sheet with strong brand equity are key catalyst for the GSKP. We expect recovery in the acute therapies to continue in the coming quarters. However, the current valuation already captures all near term upside, hence, maintained HOLD.

* Robust growth in key brands: Revenue grew 14.8% YoY during the quarter to Rs10.1bn beat our expectation of Rs8.3bn amid strong growth in brands like Augmentin and Calpol partially supported by favorable seasonality. Declining COVID19 cases should support the recovery in the acute segment in the coming quarters. Gross margin improved 190bps YoY but it dropped 60bps QoQ. However, EBITDA margins improved 820bps QoQ to 27.4% mainly due to operational leverage. Subsequently net profit grew 68.7% QoQ to Rs2.0bn. Company has announced transfer of the OTC brands Iodex and Ostocalcium to GSK Asia Pvt Ltd for a consideration of Rs16.5bn implying valuation of ~6x of sales and ~16x of EBITDA. This transaction is expected to complete before year end subject to shareholders and regulatory approvals.

* Key products performance: As per AIOCD data the GSKP has reported 16.5% YoY growth and top 10 brands grew 21.7%. All brands reported strong growth with Augmentin, Calpol and Ceftum reporting growth of 25.9%, 87.7% and 30.9% respectively. T-Bact, Betnovate N and Betnovate C grew 25.1%, 24.0% and 5.2% respectively for the quarter. Synflorix and Infanrix Hexa declined 29.7% and 2.6% YoY with low demand due to COVID-19.

* Outlook: Excluding transfer of brands, we expect FY22 to report a strong growth both on revenue and earnings with healthy recovery in the acute segment and low base. We expect 7.1% revenue and 22.3% PAT CAGR over FY21-FY23E driven by growth in power brands, traction in newly launched products and recovery in key therapies like vaccines, respiratory and VMN. Minimal capex requirement would aid cashflow generation of ~Rs18bn in next two years.

Valuations and risks: We decrease earnings estimates by 2-5% for FY22E-FY23E to factor-in transfer of OTC brands. Maintain HOLD with a target price of Rs1,564/share based on 40xFY23E earnings (earlier: Rs1,646/share). Key downside risks: addition of key drugs in NLEM, product concentration and government intervention. Key upside risks: faster than expected growth in brands and swift recxovery in vaccines.

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