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Business in recovery mode! Valuation adequately factors in the earnings upside

* GlaxoSmithKline Pharma (GLXO), a domestic-focused player, reported a moderate revenue/EBITDA/PAT growth of 3%/10%/14% over FY18-23.

* In FY24, GLXO exhibited a healthy pick-up with 6.2%/13.0%/20.5% YoY growth in revenue/EBITDA/PAT, fueled by increased NLEM-based product volumes, takeoff of its vaccines business (from 3QFY24), and traction in new launches.

* Considering an 8% earnings CAGR and a stabilizing return ratio of ~35% over FY24-26E, we value GLXO at 45x 12M forward earnings to arrive at our TP of INR2,380. We believe the current valuation as well as ~84% stock appreciation over the past one year adequately factors in the upside in earnings. Hence, we reiterate our Neutral rating on the stock. Enhanced effort in Rx drives FY24 sales growth despite the NLEM impact

* In FY24, GLXO’s ex-vaccines business posted high-single-digit growth despite the addition of key brands, such as Ceftum and T-Bact in NLEM. The growth was propelled by a surge in volumes of Ceftum/T-Bact (+56%/ +10%).

* GLXO has consistently underperformed IPM over FY18-23, due to a higher share of revenue from acute therapies, 40% of its generic medicine portfolio being under NLEM, and a slower takeoff of key therapies such as vaccines.

* GLXO has the highest share from acute therapies (94% of total FY24 sales), which has underperformed IPM by 410bp over MAT Apr’20-24.

* Further, the company’s key therapies, such as Derma, Anti-infective, Pain, and Hormones have all underperformed IPM.

* Over the last two years, however, Trelegy Ellipta has witnessed decent growth in the specialty portfolio.

* GLXO’s ex-vaccines business is likely to drive growth, led by increased awareness of its brands through campaigns & advertisements, a focus on growing newly launched brands, and niche launches in its specialty portfolio.

Efforts underway to scale-up the vaccines business

* Over FY22-24, GLXO’s vaccines business declined due to a slower takeoff of its vaccines during the pandemic and an increase in offerings in the National Immunization Program (NIP).

* However, the vaccines business has stabilized now and delivered growth in 3Q/ 4QFY24, led by the traction in pediatric vaccines, adult vaccines, and growth in products included in NIP.

* GLXO is implementing efforts to improve the growth prospects of its vaccines business by increasing awareness of both pediatric and adult vaccines, relaunching older brands (like Viralix), and launching new brands.

Valuation and view

* We expect GLXO to deliver a revenue/EBITDA/PAT CAGR of 9%/10%/8% over FY24-26, aided by: a) an increase in brand awareness, b) new launches in vaccines and specialty segment, c) volume takeoff in NLEM portfolio, and d) traction in new launches such as Trelegy Ellipta/Shingrix.

* We await clarity on any further launches from the parent portfolio.

* We value GLXO at 45x 12M forward earnings to arrive at our TP of INR2,380. Considering an 8% earnings CAGR and a stabilizing return ratio of ~35% over FY24-26E, we believe the current valuation adequately factors in the earnings upside. Reiterate Neutral.

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