3QFY2017 Result Update | Pharmaceutical

February 15, 2017

GlaxoSmithKline Pharmaceuticals

NEUTRAL

CMP

`2,683

Performance Highlights

Target Price

Y/E Mar (` cr)

3QFY2017 2QFY2017

% chg (QoQ) 3QFY2016

% chg (YoY)

Investment Period

Net Sales

689

783

(12.0)

730

(5.6)

Stock Info

Other income

9.6

(19.5)

Sector

Pharmaceutical

Gross profit

332

421

(21.2)

390

(14.9)

Market Cap (`

cr)

22,726

Operating profit

124

(71.9)

(58.6)

Net Debt (` cr)

(1,055)

Adj. PAT

(58.3)

(49.6)

Beta

0.33

Source: Company, Angel Research

52 Week High / Low

3,850/2,600

Avg. Daily Volume

1,835

For 3QFY2017 Glaxo Pharmaceuticals (GSK) posted results lower than

Face Value (`)

expectations on all fronts. In sales, the company posted sales of `689cr v/s

BSE Sensex

28,339

`700cr expected, a yoy de-growth of 5.6%. On EBITDA front, the company

Nifty

8,792

posted EBITDA of

5.1% (v/s

9.1% expected) v/s

11.6% in 3QFY2016.

Reuters Code

GLAX.BO

Consequently, Adj. PAT came in at `40.8cr (v/s `78.4cr expected) v/s `81cr in

Bloomberg Code

GLXO@IN

3QFY2016, de-growth of 49.6% yoy. We maintain our Neutral rating.

Results below expectations: Glaxo Pharmaceuticals, posted results lower than

Shareholding Pattern (%)

expected on all fronts. In sales, the company posted sales of `689cr v/s `700cr

Promoters

75.0

expected, a yoy de-growth of 5.6%. On EBITDA front, the company posted

MF / Banks / Indian Fls

10.6

EBITDA of 5.1% (v/s 9.1% expected) v/s 11.6% in 3QFY2016. Consequently,

FII / NRIs / OCBs

2.2

Adj. PAT came in at `40.8cr (v/s `78.4cr expected) v/s `81cr in 3QFY2016,

Indian Public / Others

12.2

de-growth of 49.6% yoy. The net profit came in lower than expected OPM’s,

which was eroded on the back of lower sales and pricing pressures.

Outlook and valuation: Company has a strong balance sheet with cash of

Abs. (%)

3m 1yr

3yr

~`2,000cr, which could be used for future acquisitions or higher dividend pay

Sensex

5.7

23.3

39.1

outs. On the operational front, we expect the company’s net sales to post a

Glaxo

1.7

(16.2)

(10.8)

CAGR of 9.6% to `3,290cr and EPS to register a mere CAGR of 16.9% to `60.3

over FY2016-18E. We remain Neutral on the stock.

3-year price chart

Key financials (Consolidated)

4,000

Y/E Mar (` cr)

FY2015*

FY2016

FY2017E

FY2018E

3,500

Net sales

3,272

2,741

2,800

3,290

3,000

% chg

28.9

(16.2)

2.1

17.5

2,500

Net profit

509

374

273

511

2,000

% chg

9.8

(26.5)

(27.2)

87.5

1,500

EPS (`)

60.1

44.2

32.2

60.3

EBITDA (%)

17.8

16.5

10.2

20.6

P/E (x)

44.6

60.7

83.4

44.5

Source: Company, Angel Research

RoE (%)

26.7

21.2

17.2

34.5

RoCE (%)

26.7

21.7

13.9

37.5

P/BV (x)

12.4

13.4

15.4

15.3

EV/Sales (x)

6.4

7.8

6.7

Sarabjit Kour Nangra

+91 22 39357800 Ext: 6806

EV/EBITDA (x)

35.8

47.3

76.4

32.4

[email protected]

Source: Company, Angel Research; Note: CMP as of February 14, 2017; * 15 months numbers

Please refer to important disclosures at the end of this report

Glaxo Pharma | 3QFY2017 Result Update

Exhibit 1: 3QFY2017 - Standalone performance

Y/E March (` cr)

3QFY17

2QFY17

% chg (QoQ)

3QFY16

% chg (YoY)

9MFY17

9MFY16

% chg

Net Sales

689

783

(12.0)

730

(5.6)

2,157

2,065

4.5

Other income

9.6

(19.5)

117

119

(1.5)

Total Income

727

817

(11.0)

777

(6.5)

2,275

2,184

4.2

Gross profit

332

421

(21.2)

390

(14.9)

1,125

1,119

0.5

Gross margin

48.2

53.8

53.4

52.1

54.2

Operating profit

124

(71.9)

(58.6)

230

327

(29.7)

Operating margin (%)

5.1

15.9

11.6

10.6

15.8

Interest

Depreciation & Amortization

0.5

(15.4)

3.1

PBT & Exceptional Items

152

(56.6)

123

(46.5)

328

428

(23.3)

Less : Exceptional Items

(2)

(14)

Profit before tax

154

(49.2)

121

(35.6)

341

415

(17.7)

Provision for taxation

(52.9)

(43.4)

117

145

(19.1)

Reported PAT

(46.4)

(32.9)

224

268

(16.5)

Adj. Net profit

(58.3)

(49.6)

211

277

(23.9)

EPS (`)

4.8

11.5

9.6

24.9

32.7

Source: Company, Angel Research,

Exhibit 2: 3QFY2017 - Actual Vs Angel estimates

(` cr)

Actual

Estimates

Variation (%)

Net sales

689

700

(1.5)

Other income

(19.6)

Operating profit

(44.8)

Tax

0.0

Adj. net profit

(47.9)

Source: Company, Angel Research

Revenue de-grew by 5.6%

In sales, the company posted sales of `689cr v/s `700cr expected, a yoy de-

growth of 5.6%. The sales during the quarter were impacted on the back of the

mandatory price cuts by 5% in the current quarter. The estimated impact of

demonetization adversely impacted sales further by

5%, mainly in acute &

consumer brands.

February 15, 2017

Glaxo Pharma | 3QFY2017 Result Update

Exhibit 3: Sales trend

800

783

40.0

729

35.0

686

685

689

30.0

700

25.0

20.0

600

15.0

10.0

5.0

500

0.0

(5.0)

400

(10.0)

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Sales

Growth (YoY)

Source: Company, Angel Research

OPM lower the expected

The company posted OPM of 5.1% (v/s 9.1% expected) v/s 11.6% in 3QFY2016.

On the operating front, the gross margin came in at 48.2% v/s 53.4% in

3QFY2016. This was mainly on back of pricing pressures in the domestic

formulation market.

Exhibit 4: OPM trend

25.0

17.8

20.0

15.9

15.0

11.6

10.2

10.0

5.0

5.1

0.0

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel Research

Net profit lower than estimated

Consequently, Adj. PAT came in at `40.8cr (v/s `78.4cr expected) v/s `81.0cr in

3QFY2016, de-growth of 49.6% yoy. The net profit was lower than expected, on

back of OPMs, which was eroded on the back of lower sales and pricing

pressures.

February 15, 2017

Glaxo Pharma | 3QFY2017 Result Update

Recommendation rationale

Renewed focus on the Indian market: GSK is among the top ten players in the

Indian pharmaceutical market, having a market share of ~3.7%. Unlike other

MNCs, the company has been amongst the few which have taken initiatives to

grow their businesses in the Indian market with consistent launch of new products.

Over the last six years, the company has strategically decided to expand its

presence in the Specialty segment. The Specialty segment’s contribution to sales

has reached 23% (as of 2013). Another segment which is strong for the company

is the area of vaccine, where GSK Vaccines has become the leading company in

the private market for vaccines in India. The recently introduced vaccine for

pneumococcal conjugate disease, Synflorix, has become the biggest brand in the

vaccine portfolio of the company in the second year of its launch. The efforts of the

company in raising awareness about vaccines and preventable diseases continue

with increasing fervor. Also, in FY2015, GlaxoSmithKline Plc (Glaxo), London, UK,

entered into three inter-conditional agreements with Novartis AG (Novartis), Basel,

Switzerland. In one such agreement Glaxo agreed to acquire Novartis’ vaccines

business (excluding influenza vaccine) and its manufacturing capabilities and

facilities, and in the second agreement, Glaxo agreed to sell the rights of its

Marketed Oncology Portfolio, related R&D activities and AKT Inhibitors currently in

development to Novartis. Globally, these transactions with Novartis were

completed on March 2, 2015.

On the other hand, its other key segments like mass markets and mass specialty,

which contribute 60% of its sales, de-grew by 12% in CY2013. This was as a result

of a number of products of the company having come under the DPCO 2013

ruling, resulting in reduction in prices of its drugs, which impacted its sales in

CY2013. Along with this, the supply constraints, mainly from local supplies during

FY2015, have been impacting its performance. However, going forward, with

company’s own facilities coming on stream in FY2017, we expect the volatility in

sales to end. Overall, for FY2016-18E, we expect the domestic formulation

business of the company to grow at a CAGR of 10.0%.

Significant capex plans ahead indicate revival in growth: Global pharmaceutical

major Glaxo announced an `864cr investment in India to set up a medicine

manufacturing unit. The new facility will substantially increase the company’s

manufacturing base. The drug maker is proactively building capacity in the country

as it delivers its portfolio of products in areas such as gastroenterology and anti-

inflammatory medicines. When complete, the factory will make pharmaceutical

products for the Indian market at a rate of up to 8bn tablets and 1bn capsules a

year. The facility, expected to be operational by 2017, will include a warehouse,

site infrastructure, and utilities to support the manufacturing and packing of

medicines. It showcases GSK's latest commitment to its manufacturing network in

India where the company has invested `1,017cr over the last decade. The

development is positive and comes after a long lull in terms of investments.

February 15, 2017

Glaxo Pharma | 3QFY2017 Result Update

Outlook and valuation

GSK has a strong balance sheet with cash of ~`2,000cr, which could be used for

future acquisitions or higher dividend payouts. The company’s parent company

Glaxo increased stake in it through a voluntary open offer, after which Glaxo holds

75% stake in the Indian subsidiary. The buy-back of shares is a strong indicator

from the Management towards the performance of its listed Indian entity,

especially as it comes after the recent `864cr investment plan announced by the

company to fuel its growth prospects in the Indian pharmaceuticals market. The

said investments are expected to fructify by 2017.

On the operational front, we expect the company’s net sales to post a CAGR of

9.6% to

`3,290cr and EPS to register a CAGR of

16.9% to

`60.3 over

FY2016-18E. At current level, the stock is trading at 83.4x and 44.5x its FY2017E

and FY2018E earnings respectively. We remain Neutral on the stock.

Exhibit 6: Key assumptions

FY2017E

FY2018E

Sales growth (%)

2.1

17.5

Growth in employee expenses (%)

16.2

5.0

Operating margin (%)

10.2

20.6

Capex (` cr)

200

Source: Company, Angel Research

Exhibit 7: One-year forward PE

5,500

4,500

3,500

2,500

1,500

500

Price

18x

30x

42x

54x

Source: Company, Angel Research

February 15, 2017

Glaxo Pharma | 3QFY2017 Result Update

Exhibit 8: Recommendation summary

Company

Reco

CMP Tgt. price Upside

FY2018E

FY16-18E

FY2018E

(`)

% PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Neutral

558

18.4

3.0

11.4

(10.8)

27.5

25.3

Aurobindo Pharma Buy

659

877

33.0

13.9

2.7

9.8

18.1

22.5

26.1

Cadila Healthcare

Accum.

366

400

9.4

19.0

3.6

13.3

13.4

22.7

25.7

Cipla

Sell

577

465

(19.4)

23.5

3.2

15.9

14.2

12.2

13.9

Dr Reddy's

Neutral

2,944

20.6

3.0

11.8

1.7

16.2

15.9

Dishman Pharma

Neutral

216

19.1

2.5

9.5

13.3

10.3

10.9

GSK Pharma*

Neutral

2,683

44.5

7.9

32.8

16.9

37.5

34.5

Indoco Remedies

Reduce

266

240

(9.6)

16.6

2.3

10.7

33.2

19.1

20.1

Ipca labs

Buy

523

613

17.2

26.5

2.1

12.0

36.5

8.8

9.4

Lupin

Buy

1,435

1,809

26.0

20.7

4.1

12.7

17.2

24.4

20.9

Sanofi India

Neutral

4,165

24.2

3.9

17.3

22.2

25.6

28.8

Sun Pharma

Buy

650

847

30.3

18.4

4.6

11.7

26.5

18.9

20.1

Source: Company, Angel Research; Note: * December year ending;

February 15, 2017

Glaxo Pharma | 3QFY2017 Result Update

Company Background

GlaxoSmithKline Pharmaceuticals (GSK) is the sixth largest pharmaceutical player

in the Indian market with a market share of ~3.7%. The company’s product

portfolio includes both, prescription medicines and vaccines. GSK sells prescription

medicines across therapeutic areas such as anti-infectives, dermatology,

gynaecology, diabetes, oncology, cardiovascular diseases and respiratory

diseases. A large portion of the company’s revenue comes from the acute

therapeutic portfolio. However, the company is now scouting for opportunities in

high-growth therapeutic areas such as CVS, CNS, diabetes and oncology. Further,

with a strong parentage, the company plans to increase its product portfolio

through patented launches and vaccines. To fructify the same, the company plans

to enhance its manufacturing assets with its parent company investing `864cr in it,

the capacity expansion is expected to fructify in 2017.

February 15, 2017

Glaxo Pharma | 3QFY2017 Result Update

Profit & loss statement

Y/E March (` cr)

CY2012

CY2013

FY2015

FY2016

FY2017E FY2018E

Gross sales

2,692

2,589

3,328

2,800

2,872

3,357

Less: Excise duty

Net sales

2,621

2,538

3,272

2,741

2,800

3,290

Other operating income

Total operating income

2,651

2,563

3,305

2,768

2,827

3,317

% chg

11.4

(3.3)

28.9

(16.2)

2.1

17.3

Total expenditure

1,862

2,034

2,690

2,289

2,515

2,614

Net raw materials

1,104

1,164

1,510

1,233

1,456

1,481

Other Mfg costs

115

107

115

Personnel

296

362

493

443

504

530

Other

369

420

572

514

448

488

EBITDA

759

504

582

452

285

676

% chg

2.1

(33.6)

15.5

(22.4)

(36.9)

137.1

(% of Net Sales)

29.0

19.9

17.8

16.5

10.2

20.6

Depreciation& amortization

EBIT

741

484

557

427

248

631

% chg

2.6

(34.7)

15.0

(23.3)

(41.9)

154.4

(% of Net Sales)

28.3

19.1

17.0

15.6

8.9

19.2

Interest & other charges

Other income

175

177

200

125

(% of PBT)

Share in profit of Associates

Recurring PBT

945

685

789

579

401

784

% chg

4.4

(27.5)

15.1

(26.5)

(30.8)

95.6

Extraordinary expense/(Inc.)

101

(26)

(3)

PBT (reported)

844

711

756

582

401

784

Tax

318

230

279

203

128

273

(% of PBT)

37.7

32.3

36.9

34.8

32.0

34.8

PAT (reported)

526

482

477

377

273

511

Add: Share of earnings

of asso.

Less: Minority interest (MI)

Prior period items

Exceptional items

PAT after MI (reported)

526

482

477

377

273

511

ADJ. PAT

657

464

509

374

273

511

% chg

12.0

(29.4)

9.8

(26.5)

(27.2)

87.5

(% of Net Sales)

25.1

18.3

15.6

13.7

9.7

15.5

Basic EPS (`)

Fully diluted EPS (`)

% chg

12.0

(29.4)

9.8

(26.5)

(27.2)

87.5

February 15, 2017

Glaxo Pharma | 3QFY2017 Result Update

Balance Sheet

Y/E March (` cr)

CY2012

CY2013

FY2015

FY2016

FY2017E

FY2018E

SOURCES OF FUNDS

Equity share capital

Preference Capital

Reserves& surplus

1,922

1,905

1,744

1,611

1,388

1,404

Shareholders funds

2,007

1,990

1,829

1,696

1,473

1,489

Minority Interest

Total loans

Other long-term liabilities

Long-term provisions

236

242

273

291

Deferred tax liability

(87)

(92)

(83)

(89)

Total liabilities

2,165

2,148

2,026

1,900

1,677

1,693

APPLICATION OF FUNDS

Gross block

274

323

467

725

925

1,125

Less: Acc. depreciation

227

247

272

297

334

379

Net block

195

428

591

746

Capital work-in-progress

Goodwill

Other non-current assets

Long-term loans and adv.

195

238

307

313

320

376

Investments

Current assets

2,602

2,614

2,587

2,172

1,786

1,777

Cash

2,067

2,042

1,911

1,348

946

790

Loans & advances

134

238

122

123

126

148

Other

401

335

554

701

714

839

Current liabilities

836

889

1,107

1,058

1,064

1,250

Net current assets

1,765

1,725

1,480

1,115

722

527

Mis. Exp. not written off

Total Assets

2,165

2,148

2,026

1,900

1,677

1,693

February 15, 2017

Glaxo Pharma | 3QFY2017 Result Update

Cash flow statement

Y/E March (` cr)

CY2012 CY2013 FY2015 FY2016 FY2017E FY2018E

Profit before tax and exceptional

844

711

756

582

401

784

Depreciation

(Inc)/Dec in working capital

(25)

114

(197)

(9)

Direct taxes paid

318

230

279

203

128

273

Cash Flow from Operations

519

517

616

207

300

595

(Inc.)/Dec.in fixed assets

(28)

(49)

(144)

(258)

(200)

(Inc.)/Dec. in investments

(57)

(45)

(10)

Cash Flow from Investing

(85)

(93)

(154)

(258)

(200)

Issue of equity

Inc./(Dec.) in loans

Dividend paid (Incl. Tax)

(491)

(495)

(624)

(495)

Others

110

(16)

Cash Flow from Financing

(381)

(448)

(593)

(512)

(495)

Inc./(Dec.) in cash

(25)

(131)

(563)

(402)

(156)

Opening cash balances

2,014

2,067

2,042

1,911

1,348

946

Closing cash balances

2,067

2,042

1,911

1,348

946

790

February 15, 2017

Glaxo Pharma | 3QFY2017 Result Update

Key ratio

Y/E March

CY2012

CY2013

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

34.6

49.0

44.6

60.7

83.4

44.5

P/CEPS

41.8

45.3

56.6

73.4

40.9

P/BV

11.3

11.4

12.4

13.4

15.4

15.3

Dividend yield (%)

1.9

EV/Sales

7.9

8.2

6.4

7.8

6.7

EV/EBITDA

27.2

41.1

35.8

47.3

76.4

32.4

EV / Total Assets

9.5

9.6

10.3

11.3

13.0

Per Share Data (`)

EPS (Basic)

77.6

54.8

60.1

44.2

32.2

60.3

EPS (fully diluted)

77.6

54.8

60.1

44.2

32.2

60.3

Cash EPS

64.2

59.2

59.3

47.4

36.5

65.6

DPS

50.0

Book Value

236.9

234.9

215.9

200.2

173.9

175.8

Returns (%)

RoCE (Pre-tax)

34.7

22.4

26.7

21.7

13.9

37.5

Angel ROIC (Pre-tax)

RoE

33.3

23.2

26.7

21.2

17.2

34.5

Turnover ratios (x)

Asset Turnover (Gross Block)

9.7

8.6

8.4

4.6

3.4

3.2

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

107

101

Solvency ratios (x)

Net debt to equity

(1.0)

(0.8)

(0.6)

(0.5)

Net debt to EBITDA

(2.7)

(4.0)

(3.3)

(3.0)

(3.3)

(1.2)

Interest Coverage (EBIT / Int.)

February 15, 2017

Glaxo Pharma | 3QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement

Glaxo Pharma

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

February 15, 2017