Reduce GSK Pharma; target of Rs 2118: Dolat Capital

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Reduce GSK Pharma; target of Rs 2118: Dolat Capital

Dolat Capital is bearish on GlaxoSmithKline Pharmaceuticals and has recommended reduce rating on the stock with a target of Rs 2118 in its November 9, 2011 research report.

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Dolat Capital is bearish on GlaxoSmithKline Pharmaceuticals and has recommended reduce rating on the stock with a target of Rs 2118 in its November 9, 2011 research report.

"GlaxoSmithKline Pharmaceuticals, Q3 CY11 topline grew 4.3% YoY to Rs 6.15bn. Net pharma sales grew 6.5% YoY, led by higher contribution from vaccines and specialty products, while anti-infectives grew relatively lesser. Operating margins (excluding other income) shrunk by 690bps YoY to 29.8%. Raw material and employee cost shot up by 270bps and 100bps YoY respectively to 39.4% and 10.8% of sales. Other expenses as a percentage of sales stood at 21.7% (up 320bps YoY). Interest income grew a healthy 45% YoY to Rs 371mn. Nevertheless, higher cost pressures weighed on profit margins. Depreciation rose to Rs 49mn (up 19.5% YoY). Tax rate stood lower at 32.2% (33.3%- Q3 CY10). PAT (before exceptional items) declined 7.7% YoY to Rs 1.46bn. We believe the proposed New Drug Policy 2011 will hit GSK's performance as around 60% of its product portfolio stands exposed under the policy's purview. We await further clarity in this regard. However, we expect sustained growth in its specialty and vaccine products line."

"Revenue grew by a mere 4.3% YoY to Rs 6.15bn. The pharma business's net sales grew 6.5% YoY, led by higher contribution from vaccines and mass specialty products. However, the mass market and anti-infectives segments witnessed lower growth. Interest income for the quarter grew a healthy 45% YoY to Rs 371mn. Nevertheless, higher cost pressures weighed on profit margins. Operating margins (excluding other income) stood at 29.8% (down 690bps YoY). Raw material and employee cost rose 270bps and 100bps YoY to 39.4% and 10.8% of sales respectively. Other expenses stood at 21.7% of sales (up 320bps YoY). Continued planned investment to increase field force restricted margin expansion. Depreciation rose 19.5% YoY to Rs 49mn. Tax rate stood slightly lower at 32.2% (33.3% in Q3 CY10). PAT (before exceptional items) declined 7.7% YoY to Rs 1.46bn. Exceptional items (net of tax) worth Rs 1mn were recognised for the quarter."

"Sustained growth in priority products and vaccines, with a gradual scale-up in revenues from new product launches, will result in revenue growth of 11% over CY10-12E. At a CMP of Rs 2,109, the stock trades at 29.5x CY11E and 25.9x CY12E earnings. We revise our recommendation to Reduce with a revised target price of Rs 2,118 (26x CY12E earnings)," says Dolat Capital research report.

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