25 July 2017
1QFY18 Results Update | Sector: Healthcare
GSK Pharma
Neutral
BSE SENSEX
32,228
S&P CNX
9,965
CMP: INR2,510 TP: INR2,500 (0%)
GST impacts revenues, margins tank
Motilal Oswal values your support in the
Asiamoney Brokers Poll 2017 for India
Research, Sales and Trading team. We
request your ballot.
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm
Free float (%)
GLXO IN
85
212.6 / 3.3
3430 / 2309
-2/-24/-41
38
25.0
Financials & Valuations (INR b)
Y/E Mar
2017 2018E
Net Sales
29.3
31.6
EBITDA
3.5
4.5
PAT
2.9
4.0
EPS (INR)
34.4
46.8
Gr. (%)
-22.2
36.2
BV/Sh (INR)
236.9
203.2
RoE (%)
14.5
23.0
RoCE (%)
15.7
21.3
P/E (x)
73.0
53.6
P/BV (x)
10.6
12.4
2019E
35.4
5.6
4.7
54.9
17.3
177.6
30.9
28.8
45.7
14.1
Estimate change
TP change
Rating change
GSK Pharma’s (GLXO) 1QFY18 sales declined 14.4% YoY to INR5.9b (24%
miss). It recorded EBITDA loss of INR6m (est. of INR1.2b) due to lower
turnover, and higher other expense (includes one-time expense of INR111m
relating to arrears in payment of State Entry Tax) and employee expense.
Reported PAT declined 63% YoY to INR264m, including INR124m of one-time
income from sale of properties.
GST impact evident, recovery expected in coming months:
Inventory de-
stocking in the run up to GST roll-out impacted primary sales by INR1.3b (~2
weeks of sales). Adjusted for the GST impact, revenue grew ~6% YoY in
1QFY18. Although gross margin remained largely flat YoY and improved
marginally QoQ, GLXO made insignificant EBITDA in 1Q (INR-6m) as
operating cost below GM remained largely flat. Unlike Alembic which
reduced its promotional expense during the quarter, it looks like GLXO has
maintained its marketing expense, and thus, other expense for the company
went up during the quarter despite lower sales.
Margin improvement is key:
Apart from GST, regulatory issues continued to
have a negative impact on margins. We expect recovery in sales and margins
from 2Q, led by channel re-filing. According to AIOCD, FDC-related market
(which declined 10.9%) continued to drag companies. Secondary sales of
GLXO increased 8.6% in 1QFY18 v/s 7.5% for industry.
Valuation and view:
We believe GLXO has strong parent support, superior
brand portfolio (competitive advantage), high payout ratio (>100%) and
industry-leading return ratios (RoCE of ~30%). We maintain our
Neutral
rating with a target price of INR2,500 @ 45x FY19E PER (v/s INR2,700 @ 45x
FY19E PER). We have cut our FY18/19E EPS by ~10/9% as we do not expect
full sales recovery.
Kumar Saurabh
(Kumar.Saurabh@MotilalOswal.com); +91 22 6129 1519
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

GSK Pharma
GSK Pharma
Exhibit 1: Top 10 Drugs
MAT June 17
Growth (%)
Mkt
Sh. (%)
100.0
8.6
7.4
5.9
4.9
4.7
4.5
4.4
3.8
2.9
2.8
Last 3M
June-17
GSK Pharma’s secondary
sales increased 9.2% YoY in
June 17
Drug
Total
Augmentin
Synflorix
Calpol
Zinetac
Betnovate C
Betnovate N
Eltroxin
Ceftum
Betnesol
Rotarix
Therapy
Anti-Infectives
Vaccines
Pain / Analgesics
Gastro Intestinal
Derma
Derma
Hormones
Anti-Infectives
Hormones
Vaccines
Value
(INR m)
34,149
2,949
2,521
2,007
1,687
1,611
1,539
1,506
1,312
991
967
Growth
(%)
2.3
(2.5)
27.0
12.4
7.1
4.7
1.4
11.2
4.7
(11.7)
(29.2)
8.6
9.2
19.5
41.2
27.7
29.3
(1.5)
(0.3)
(5.4)
3.5
41.5
47.0
28.8
33.8
11.2
11.4
3.0
3.4
8.3
24.5
(17.0)
(28.0)
Source: AIOCD, MOSL
Exhibit 2: Therapy Mix (%)
Share
Total
Anti-Infectives
Derma
Vaccines
Pain / Analgesics
Vitamins / Minerals / Nutrients
Hormones
100.0
21.4
18.8
18.3
9.2
8.3
7.5
MAT Growth
(%)
2.3
(2.0)
3.1
8.2
4.8
15.2
0.3
3M*
8.6
5.4
35.9
4.9
(7.0)
24.5
9.8
June 17 Growth
9.2
11.7
33.6
(0.9)
(5.3)
19.9
15.2
Source: AIOCD, MOSL
GSK Pharma’s dermatology
products exhibited 33.6%
YoY increase in secondary
sales
Exhibit 3: Brand wise growth distribution
% of sales
MAT growth (%)
2.3
3.4
3.7
9.4
(10.6)
Growth
Contribution (%)
100.0
74.3
34.8
59.5
(68.6)
Source: AIOCD, MOSL
Decline in price growth
weighed on
MAT growth
Total
Top 10 Brands
11 to 25 Brands
26 to 50 Brands
Above 50 Brands
100.0
50.0
21.6
15.4
12.9
Exhibit 4: Acute v/s Chronic (MAT growth)
MATVALUE_JUN_16
MATVALUE_GR_JUN_17
2.5
Exhibit 5: Growth Distribution (%) (MAT June 17)
3.9
2.3
29.1
ACUTE
4.2
CHRONIC
Source: AIOCD, MOSL
Vol GR
-2.6
Price GR
NP GR
Source: AIOCD, MOSL
1.0
25 July 2017
2

GSK Pharma
Operating metrics
Exhibit 6: Key operating metrics
2QFY15 3QFY15 4QFY15 5QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18
Revenue Gr. (%)
As % of sales
Raw material
Staff cost
Other expenses
Tax Rate
Margins (%)
Gross Margins
EBITDA Margins
EBIT Margins
PAT margins
51.5
16.7
22.8
15.0
53.5
21.3
26.4
17.4
55.6
17.0
22.7
7.0
55.0
19.4
26.3
16.8
55.0
16.7
23.3
15.0
57.1
15.8
22.0
13.7
53.1
14.1
17.6
11.0
55.0
17.8
21.3
15.4
54.1
10.2
15.9
10.5
53.8
15.9
19.4
12.6
48.2
5.1
8.7
52.7
15.2
18.8
53.8
-0.1
4.4
48.5
15.7
19.2
34.1
46.5
13.5
18.8
34.1
44.4
16.4
22.2
37.7
45.0
16.5
20.0
32.0
45.0
17.4
0.2
34.0
42.9
16.1
0.3
32.9
46.9
15.6
0.2
35.1
45.0
15.9
0.2
38.6
45.9
17.2
0.3
35.4
46.2
16.2
0.2
35.2
51.8
17.5
0.3
41.8
47.3
15.4
22.1
39.6
46.2
22.5
31.4
35.5
2.8
19.1
2.5
2.3
-5.1
-5.3
12.8
11.8
10.2
11.8
-5.4
11.3
-14.4
7.7
14.8
4.5
Source: Company; MOSL
Valuation and view
We expect limited valuation upside for GLXO from current levels. The stock currently
trades at 54x FY18E and 46x FY19E, a huge premium to the sector
However, we believe that premium multiples for GLXO are justifiable owing to:
Strong MNC parentage providing access to innovative products
Formidable brands in the domestic market, providing competitive advantage
Industry leading return ratios, with ROCE of ~30%
Earnings rebound over next two years as we expect 26% EPS CAGR (FY17-19E)
compared to -11% EPS growth in FY16.
Maintain Neutral:
We believe GLXO has strong parent support, superior brand
portfolio (competitive advantage), high payout ratio (>100%) and industry-leading
return ratios (RoCE of ~30%). We maintain our
Neutral
rating with a target price of
INR2,500 @ 45x FY19E PER (vs INR2,700 & 45x FY19E PER). We have cut our
FY18/19E EPS by ~10/9% as we do not expect full recovery of loss of sales happened
in 1Q FY18.
Exhibit 7: GSK trades at 51x P/E (1 yr fwd)
120
102
84
66
48
30
12
PE (x)
Peak(x)
Avg(x)
98.1
Min(x)
Exhibit 8: Premium valuation relative to Sensex to P/E
600
400
200
135.4
139.1
GSK Pharma PE Relative to Sensex PE (%)
41.3
15.3
44.6
0
-200
Source: Bloomberg, MOSL
Source: Bloomberg, MOSL
25 July 2017
3

GSK Pharma
Story in charts
Exhibit 9: Implementation of GST impacted revenues
Net Sales (INR m)
12.8 11.8
10.2
YoY growth (%)
11.8
11.3
5,868
1,036 1,105 1,027 1,220
6,219 7,000 7,287 6,861 6,852 7,829 6,893 7,634
-14.4
Exhibit 10: Lower turnover & higher expense impacted
margins
16.7
EBITDA (INR m)
17.8
15.8
14.1
10.2
5.1
702
1,245
350
1,165
-6
-0.1
EBITDA margins (%)
15.9
15.3
-5.1 -5.3
-5.4
Source: Company, MOSL
Source: Company, MOSL
Exhibit 11: Volume uptick to aid recovery in sales growth
12.9
Total sales (INR m)
YoY Growth (%)
Exhibit 12: Profitability to improve gradually
EBITDA (INR m)
EBITDA Margin (%)
10.7
11.2
32,725
4.7
6.8
7.9
31.8
30.3
19.7
18.4
6,009
3.9
16.5
11.8
14.1
4,455
15.8
5,586
7,445
23,380 25,999 25,202
CY11
CY12
CY13
-3.1
FY15
27,411 29,265 31,576 35,365
FY16
FY17
FY18E FY19E
CY11
7,888
4,961
CY12
CY13
4,516
FY16
3,455
FY17
FY15
FY18E FY19E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 13: EPS is expected to improve from FY18E
EPS
74.5
79.9
56.2
62.4
44.2
46.8
34.4
54.9
Exhibit 14: Expect cash to be distributed to stakeholders
Cash & cash equivalents (INR b)
21
21
21
19
13
9
9
7
CY11
CY12
CY13
FY15
FY16
FY17
FY18E FY19E
CY11
CY12
CY13
FY15
FY16
FY17
FY18E FY19E
Source: Company, MOSL
Source: Company, MOSL
25 July 2017
4

GSK Pharma
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2011
23,380
10.7
7,445
31.8
204
7,241
3
1,978
-2,008
7,208
2,902
40.3
0
4,306
6,314
8.6
2011
847
18,352
19,199
49
-615
18,634
2,717
1,725
991
254
1,598
26,653
3,301
853
19,841
2,657
10,862
2,714
8,148
15,790
18,634
2012
25,999
11.2
7,888
30.3
178
7,709
3
2,242
-999
8,949
3,176
35.5
0
5,773
6,772
7.3
2012
847
19,253
20,100
46
-865
19,281
2,720
1,826
894
534
1,026
27,577
2,820
1,159
20,388
3,210
10,751
3,278
7,472
16,826
19,281
2013
25,202
-3.1
4,961
19.7
199
4,762
3
2,272
262
7,292
2,274
31.2
0
5,018
4,756
-29.8
2013
847
19,325
20,172
36
-921
19,287
2,991
1,990
1,001
770
577
28,230
3,424
964
20,271
3,571
11,291
3,692
7,599
16,940
19,287
2015
32,725
3.9
6,009
18.4
254
5,756
0
2,320
519
8,594
2,793
32.5
0
5,802
5,283
-11.1
2015
847
17,443
18,290
26
-831
17,485
3,212
1,981
1,231
1,152
1
28,942
3,756
1,003
19,106
5,077
13,841
4,434
9,406
15,101
17,485
2016
27,411
4.7
4,516
16.5
248
4,269
0
1,500
-135
5,633
2,026
36.0
0
3,607
3,742
-11.5
2016
847
16,114
16,961
16
-888
16,089
2,244
2,229
15
4,702
1
24,854
5,259
1,266
13,476
4,854
13,483
5,362
8,121
11,371
16,089
2017
29,265
6.8
3,455
11.8
264
3,192
0
1,463
457
5,112
1,744
34.1
0
3,368
2,911
-22.2
2017
847
19,222
20,069
10
-916
19,162
3,313
464
2,850
5,732
1
20,540
4,258
1,708
9,321
5,253
9,960
6,750
3,210
10,580
19,162
(INR Million)
2018E
31,576
7.9
4,455
14.1
325
4,130
0
2,016
0
6,146
2,182
35.5
0
3,964
3,964
36.2
2018E
847
16,367
17,214
10
-916
16,308
4,813
789
4,025
4,732
1
21,760
5,368
1,579
8,813
6,000
14,209
4,736
9,473
7,550
16,308
2019E
35,365
12.0
5,586
15.8
417
5,169
0
2,042
0
7,210
2,560
35.5
0
4,651
4,651
17.3
2019E
847
14,199
15,046
10
-916
14,140
6,313
1,206
5,107
3,732
1
21,214
6,012
1,768
6,714
6,719
15,914
5,305
10,610
5,300
14,140
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
(INR Million)
25 July 2017
5

GSK Pharma
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2011
74.5
77.0
226.7
45.0
68.8
33.7
32.6
11.1
8.2
25.7
1.8
32.9
32.7
-233.1
1.2
13
52
-1.0
2011
7,445
-30
103
-2,953
2,008
6,573
-272
6,300
5
0
-267
-2,076
-3
-3
-3,863
-5,945
360
19,481
19,841
2012
79.9
82.1
237.3
45.0
64.2
31.4
30.6
10.6
7.4
24.2
1.8
33.7
34.4
-247.2
1.4
16
40
-1.0
2012
7,888
1,243
-489
-3,427
999
6,214
-361
5,853
572
0
211
-1,525
-3
-3
-4,346
-5,877
547
19,841
20,388
2013
56.2
58.5
238.1
50.0
101.5
44.7
42.9
10.5
7.6
38.7
2.0
23.6
23.6
-200.6
1.3
14
50
-1.0
2013
4,961
2,533
-712
-2,330
-262
4,190
-541
3,649
449
0
-92
145
-10
-3
-4,346
-4,215
-116
20,388
20,271
2015
62.4
65.4
215.9
62.5
117.2
50.3
48.0
11.6
7.4
40.3
2.5
23.1
21.9
-179.7
1.4
14
52
-1.0
2015
6,009
2,839
410
-2,703
-519
6,036
-603
5,433
576
0
-27
-971
-10
0
-6,194
-7,175
-1,166
20,271
19,106
2016
44.2
47.1
200.2
65.0
177.1
56.8
53.3
12.5
7.3
44.1
2.6
22.1
21.2
-176.1
1.6
17
70
-0.8
2016
4,516
1,365
-1,900
-2,083
135
2,033
-2,582
-549
0
0
-2,582
1,556
-10
0
-6,627
-5,081
-5,630
19,106
13,476
2017
34.4
37.5
236.9
30.0
105.1
73.0
67.0
10.6
6.9
58.8
1.2
14.5
15.7
104.4
1.7
21
53
-0.5
2017
3,455
1,920
-3,364
-1,772
-457
-218
-2,099
-2,317
0
0
-2,099
3,255
-6
0
-3,058
191
-2,126
13,476
11,350
2018E
46.8
50.6
203.2
70.0
180.0
53.6
49.6
12.4
6.5
45.7
2.8
23.0
21.3
61.2
1.8
18
62
-0.5
2018E
4,455
2,016
2,522
-2,182
0
6,811
-500
6,311
0
0
-500
318
0
0
-7,136
-6,819
-508
9,321
8,813
2019E
54.9
59.8
177.6
70.0
153.4
45.7
42.0
14.1
5.8
36.9
2.8
30.9
28.8
80.5
2.3
18
62
-0.4
2019E
5,586
2,042
152
-2,560
0
5,219
-500
4,719
0
0
-500
318
0
0
-7,136
-6,819
-2,099
8,813
6,714
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
(INR Million)
25 July 2017
6

GSK Pharma
Corporate profile
Company description
GSK Pharma (75% subsidiary of GSK Plc) is the 5th
largest formulations company and second largest
pharma MNC in India, with a strong presence in
segments like dermatology, respiratory and
vaccines. Its parent has one of the richest product
and R&D pipelines among Pharma companies
worldwide.
Source: MOSL/Bloomberg
Exhibit 1: Sensex rebased
Exhibit 2: Shareholding pattern (%)
Jun-17
Promoter
DII
FII
Others
75.0
10.4
1.8
12.8
Mar-17
75.0
10.3
1.8
12.9
Jun-16
75.0
9.7
2.3
13.0
Source: Capitaline
Exhibit 3: Top holders
Holder Name
LIC OF INDIA WEALTH PLUS FUND
BIRLA SUN LIFE TRUSTEE COMPANY PRIVATE
LIMITED A/CBIRLA SUN LIFE FRONTLINE
EQUITY FUND
GENERAL INSURANCE CORPORATION OF
INDIA
NA
NA
% Holding
6.4
1.5
1.1
0.0
0.0
Source: Capitaline
Note: FII Includes depository receipts
Exhibit 4: Top management
Name
Deepak Parekh
Annaswamy Vaidheesh
A Aristidou
A A Nadkarni
Designation
Chairman
Managing Director
Executive Director &
CFO
Company Secretary
Exhibit 5: Directors
Name
Raju Krishnaswamy
Anjali P Bansal
Nihal Kaviratne
R R Bajaaj
Subesh Williams
Name
A N Roy
D Sundaram
P V Bhide
Marc Jones
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
Price Waterhouse & Co LLP
R Nanabhoy & Co
Type
Statutory
Cost Auditor
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY18
FY19
MOSL
forecast
46.8
54.9
Consensus
forecast
47.2
56.5
Variation (%)
-0.9
-2.9
Source: Bloomberg
Source: Capitaline
25 July 2017
7

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GSK Pharma
Disclosure of Interest Statement
Analyst ownership of the stock
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Registration details of group entities.: MOSL: NSE (Cash): INB231041238; NSE (F&O): INF231041238; NSE (CD): INE231041238; BSE (Cash): INB011041257; BSE(F&O): INF011041257; BSE(CD); MSE(Cash): INB261041231;
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GSK Pharma
No
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