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Slower than expected recovery

GlaxoSmithKline Pharmaceuticals Limited’s (GSKP) Q1FY22 result was below our estimates. Revenue grew 21.8% YoY to Rs7.9bn (I-Sec: Rs8.8bn), EBITDA margin grew 160bps YoY (-180bps QoQ) to 19.2% (I-Sec: 22.5%) while reported PAT grew 9.2% YoY to Rs1.2bn (I-Sec: Rs1.5bn). Company has announced the transfer of brands Iodex and Ostocalcium to GSK Asia Pvt Ltd.

Recovery in key brands with continuous traction from newly launched products (Fluarix Tetra and Menveo) have supported the performance. 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. However, the recent run up has limited the upside potential, hence, downgrade to HOLD.

* Key brands recover but growth lags expectation:

Revenue grew 21.8% YoY during the quarter to Rs7.9bn as acute therapies witnessed recovery but sales fell short of our expectation of Rs8.8bn despite strong growth in brands like Augmentin and Calpol. Declining COVID-19 cases should support the recovery in the acute segment in the coming quarters. Gross margin grew 40bps YoY but it dropped 210bps QoQ. Sequentially higher employee and S,G&A expenses accentuated the drop in EBITDA margin by 180bps to 19.2%. Company received Rs212mn exceptional income as interest on income tax refund.

Company also announced transfer of the brands Iodex and Ostocalcium to GSK Asia Pvt Ltd for a consideration of Rs16.5bn. This transaction is expected to complete before year end subject to shareholders and regulatory approvals. As per AIOCD, these brands generate ~Rs800mn but it doesn’t capture the OTC sales which would be significant.

* Key products performance:

As per AIOCD data the GSKP has reported 29.3% YoY growth. All brands reported strong growth with Augmentin, Calpol and Ceftum reporting growth of 38.5%, 159% and 108% respectively. T-Bact, Betnovate N and Betnovate C grew 44.1%, 33.3% and 21.9% respectively for the quarter. Synflorix and Infanrix Hexa declined 45.9% and 3.6% YoY with low demand due to COVID-19. Fluarix Tetra and Menveo reported sales of Rs28mn and Rs45mn respectively.

* Outlook:

We expect FY22 to report a strong growth both on revenue and earnings with healthy recovery in the acute segment and low base of FY21. We expect 10.1% revenue and 25.5% 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 ~Rs17bn over the next two years.

Valuations and risks: We raise our EPS estimates by 1-2% for FY22E-FY23E to factor in higher other income. Considering the recent run up in the stock price we downgrade to HOLD from Add with a revised target price of Rs1,646/share based on 40xFY23E earnings (earlier: Rs1,613/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 recovery in vaccines.

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