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COVID-19-led weakness in performance

Outlook to improve gradually

* GSK Pharma (GLXO)’s performance for the quarter was deeply impacted by the COVID-19-led disruption. As a result, the company posted the lowest revenue recorded in the past 16 quarters. The severity amplified with reduced operating leverage. The outlook is expected to gradually improve with the easing of the lockdown.

* We reduce our EPS estimate by 26.3%/11.7% for FY21/FY22 to factor COVID19-led weakness in the Prescription and Vaccination segments. We continue to value GLXO at 37x 12M forward earnings (25% discount to its three-year average) to arrive at TP of INR1,355. Maintain Neutral.

Lower revenue, reduced operating leverage result in earnings decline

* GSK Pharma revenues were down 17.7% to INR6.5b (v/s est. of INR7.8b).

* GM expanded 230bp YoY to 60.3%, led by a better product mix.

* However, the EBITDA margin contracted 340bp YoY to 17.6% on higher employee costs / other expenditure (+530bp/+40bp YoY as a percentage of sales), offsetting the benefit of better GM.

* EBITDA declined by 31% YoY to INR1.1b (v/s est. of INR1.7b).

* Adjusting for interest on income tax refund in other income, PAT was down 33% YoY to INR787m (our estimate: INR1.3b).

Key highlights

* GLXO’s top two therapies (contributing ~40% to overall sales), Anti-Infective and Vaccine, saw decline of ~14% and ~28% YoY, respectively, dragging down sales growth for the quarter.

* Particularly, Augmentin/Ceftum (top Anti-Infective brands) declined 6%/16% YoY for the quarter.

* The deferment of vaccination on account of COVID-19 led 14% YoY decline in Synflorix sales for the quarter.

* On a 12M basis, GLAXO took a price hike of 6.7%, offset (to some extent) by flat new launches and volume decline of 3.9% on a YoY basis.

Valuation and view

* With the focus on key brands, meaningful (290bp) improvement was witnessed in the EBITDA margin over FY18–20. However, the benefit of a superior margin profile is expected to be offset by muted revenue growth (led by slowdown due to COVID-19) and reduced operating leverage.

* Accordingly, we reduce our EPS estimate by 26.3%/11.7% for FY21/FY22 to factor COVID-19-led challenges, and expect a 10% earnings CAGR over FY20– 22.

* We continue to value GLXO at 37x 12M forward earnings to arrive at TP of INR1,355.

* We maintain Neutral as the valuation adequately factors the upside.

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