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GSK Pharmaceuticals - Recovery from COVID-19 impact - ICICI Securities

Posted On: 2020-10-29 05:45:43


GlaxoSmithKline Pharmaceuticals Limited's (GSKP) Q2FY21 results were better than our estimates. Revenue remained flat YoY at Rs8.8bn (I-Sec: Rs8.2bn), EBITDA margin improved 130bps YoY (+570bps QoQ) to 23.3% (I-Sec: 22.9%) while adjusted PAT declined 27.8% YoY to Rs1.2bn (I-Sec: Rs1.3bn). Better than expected performance was driven by steady recovery in top brands with easing of lockdown. 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 for the company but current valuations seem fair, hence we maintain HOLD on the stock.

- Sequential growth as business recovers from COVID-19 impact: Revenue remained flat YoY but grew 35.6% QoQ during the quarter as acute therapies witnessed recovery with easing of lockdown. Company has informed that adjusting for the rationalisation process of tail end brands, YoY revenue growth stood at 3% in the quarter. While gross margin remained flat YoY and declined 210bps QoQ due to product mix, better efficiency and operating leverage resulted in the 130bps YoY and 570bps QoQ improvement in EBITDA margin to 23.3%, highest in several quarters. After considering all the strategic options, company has decided to proceed with the sale of the Vemgal manufacturing plant and has booked an exceptional expense of Rs641mn associated to it and classified it as an asset held for sale on the books.

- Key products performance: As per AIOCD data the GSKP has reported decline of 10.5%. Synflorix, T-Bact and Betnovate C have reported healthy YoY growth of 7.9%, 18.7% and 7.5% respectively for the quarter. However, Augmentin, Calpol, Ceftum and Betnesol have reported a YoY decline of 8.0%, 24.9%, 10.9% and 16.5% respectively. Infanrix Hexa continues its strong momentum with 18.1% YoY growth. Company has launched Fluarix Tetra, an inactivated quadrivalent influenza vaccine during the quarter.

- Outlook: FY21 estimates would optically appear lower due to Zinteac (ranitidine) sales in the base. However, we expect FY22 to report a strong growth both on revenue and earnings front. We expect 6.7% revenue and 12.1% PAT CAGR over FY20-FY23E driven by growth in power brands and key therapies like vaccines and VMN. Minimal capex requirement would aid cashflow generation of ~Rs20bn over the next three years.

- Valuations and risks: We reduce our revenue estimates by 2-4% for FY21E-FY23E to factor in lower sales. We also reduce our earnings estimates by 1-2% for FY22E-FY23E to factor in lower other income. We maintain HOLD with a revised target price of Rs1,511/share based on 40xSep'22E earnings (earlier: Rs1,539/share). Key downside risks: addition of key drugs in National List of Essential Medicines (NLEM), product concentration and government intervention. Key upside risks: better than expected performance in key products and new significant product launches.

Shares of GLAXOSMITHKLINE PHARMACEUTICALS LTD. was last trading in BSE at Rs.1482 as compared to the previous close of Rs. 1499.55. The total number of shares traded during the day was 2188 in over 467 trades.

The stock hit an intraday high of Rs. 1499.7 and intraday low of 1470. The net turnover during the day was Rs. 3237240.


Source: Equity Bulls

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