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MOSL: GSK PHARMA(Neutral) - All eyes on volume pickup for DPCO products - cut estimate by 3%-13%




Motilal Oswal Securities Ltd.


21 Apr 2014





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GSK PHARMA 1QCY14: Below estimates, all eyes on volume pickup for DPCO products; cut estimate by 3%-13%, maintain Neutral (GLXO IN, Mkt Cap USD3.5b, CMP INR2497, TP INR2550, 2% Upside, Neutral) GLXOs 1QCY14 results were significantly below expectations. Sales declined 5% to INR6b (v/s our estimate of INR6.7b), EBITDA declined 40% to INR977m (v/s our estimate of INR1.4b) and reported PAT declined 43% to INR966m (v/s our estimate of INR1.5b). Revenue growth was impacted by (a) revamped price control order, and (b) supply chain related issues, which persisted during 1Q. EBITDA margin declined 9.5pp to a multi-year low of 16.3%, 540bp lower than our estimate of 21.7%. Gross margin remained under pressure due to the new pricing policy. Higher promotional spend to ramp up the OTC business is also leading to margin pressure. Other income was INR549m, significantly below our estimate of INR811m. In the analyst meet held in February 2014, GLXO said that Augmentin volumes have increased significantly and there is strong traction in the vaccines business. GLXO is on track to launch 6-8 products in CY14, including 4-5 products in the specialty area. The management refrained from providing any financial guidance for CY14. It is looking to take select price increases for price controlled products, starting April 2014 Based on the 1QCY14 performance, we have reduced our sales forecasts for CY14 and CY15 by 3%. Though GLXO will be eligible for price increase on NLEM products starting April 2014, a part of that benefit will be negated due to the ongoing investments in building the OTC brands. We expect stronger margin improvement to come only in CY15. We cut our PAT estimates for CY14/CY15 by 13%/3%. GLXO deserves premium valuations due to its strong parentage (giving access to large product pipeline) and brand-building ability. However, current valuations of 40.3x CY14E and 29.5x CY15E EPS adequately reflect the positives, in our view. We maintain our Neutral rating. Our revised target price is INR2,550 (30x CY15E EPS). Faster than expected recovery in core operations is a key risk to our estimates and stock rating

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