Glaxo SK Pharma's (GSK) results for Q1CY13 were below our expectations for revenues and margin but in line for net profit. The company reported 1%YoY growth in revenues, 580bps decline in EBIDTA margin and 8%YoY decline in net profit before EO items. Sales during the quarter were affected by supply constraints. GSK is a debt-free company with cash/share of Rs244. We expect the growth momentum to be maintained from new products, vaccines and specialty products. We have lowered our CY13 and CY14 estimates by 7% each. We have changed GSK's rating from Buy to Neutral with a revised target price of Rs2,364 (based on 24x June'14 EPS of Rs98.5).
- Flat growth in core business: GSK reported 1%YoY growth in revenues from Rs6.29bn to Rs6.37bn. The core pharma business was flat during the quarter. Sales during the quarter were impacted by supply constraints at Nashik factory, sites for contract manufacturing and vaccines. The management expects supplies to normalise by the end of Q2CY13.
- Overall increase in cost affects margin: GSK's EBIDTA margin declined by 580bps YoY from 32.1% to 26.3% due to the increase in overall cost. The company's material cost increased by 120bps from 41.7% to 42.9% of revenues due to the rise in imported raw material cost and depreciating rupee. GSK's personnel cost grew by 210bps from 10.3% to 12.4% due to flat sales growth. Other expenses increased by 240bps from 15.9% to 18.3% of revenues due to lower sales growth.
- Major brands growing well: As per IMS MAT-March'13 data, GSK's five major brands reported higher than the market growth of 10.1% namely: Augmentin 11.2%, Zinetac 22.1%, Calpol 20.6%, Eltroxin 29.0% and Neosporin 11.8%. We expect these brands to drive future growth.
- Effect of NPPP: GSK is likely to get impacted by Rs1.65bn in revenues due to the implementation of NPPP as its major brands are currently priced higher than the ceiling price of all brands having more than 1%MS. GSK is likely to get majorly affected for Augmentin, Zentel, Cetzine and Fortum.
- Valuations: We expect GSK to benefit from growth in domestic market and introduction of new products. We have lowered our EPS estimates for CY13 and CY14 by 7% each in view of the flat revenues during the quarter. At the CMP of Rs2,398 the stock trades at 26.4x CY13E EPS of Rs90.8 and 22.6x CY14E EPS of Rs106.2. We have revised the rating from Buy to Neutral with a revised target price of Rs2,364 (based on 24x June'14 EPS of Rs98.5) with 11.4% downside from the CMP.