3QCY2011 Result Update | Pharmaceutical

November 16, 2011

GlaxoSmithKline Pharma
Performance Highlights
Y/E Dec (` cr) Net sales Other income Gross profit Operating profit Reported net profit 3QCY2011 2QCY2011 % chg (qoq) 627 42 396 203 162.1 560 42 354 186 150.4 12.0 (0.0) 11.9 9.2 7.8 3QCY2010 % chg (yoy) 582 33 367 209 158 7.8 28.4 8.1 (2.8) 2.5

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 16,785 0.2 2,475/1,905 4,183 10 16,776 5,030 GLAX.BO GLXO@IN

`1,982 -

Source: Company, Angel Research

GlaxoSmithKline Pharma (Glaxo) reported its 3QCY2011 results, which were below our estimates on the top-line and PAT fronts. The companys OPM for the quarter came in at 29.0%, lower than our estimate. We continue to maintain our Neutral view on the stock. Operating performance below estimates: For 3QCY2011, Glaxo reported 4.4% yoy growth in its net sales to `608cr, lower than our estimate of `643cr. The companys gross margin came in at 60.0%, lower than our expectation of 63.2%. This led to OPM of 29.0%, below our estimate of 32.4%, for 3QCY2011. During the quarter, Glaxo reported a 7.7% yoy dip in its net profit to `146cr, below our expectation of `162cr, due to lower-than-expected OPM. Outlook and valuation: We expect Glaxos net sales to post a 13.9% CAGR to `2,788cr and EPS to register a 14.6% CAGR to `86.9 over CY201012E. At current levels, the stock is trading 27.5x and 22.8x CY2011E and CY2012E earnings, respectively. We continue to maintain our estimates and, hence, remain Neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 50.7 17.6 17.4 14.3

Abs. (%) Sensex Glaxo

3m 0.3 (7.2)

1yr (15.6) (12.5)

3yr 78.7 85.2

Key financials (Consolidated)

Y /E Dec. (` cr) Net sales % chg Net profit % chg EPS (`) EBITDA (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

CY2009 1,908 12.7 508 (14.1) 60.0 35.3 33.1 29.8 39.9 9.4 7.9 22.3

CY2010 2,151 12.8 561 10.4 66.2 35.3 29.9 30.9 40.6 8.6 6.9 19.5

CY2011E 2,447 13.8 443 (21.0) 72.0 35.5 27.5 21.1 41.5 7.5 6.0 17.0

CY2012E 2,788 14.0 737 66.4 86.9 35.5 22.8 30.7 41.0 6.6 5.2 14.5

Sarabjit Kour Nangra

+91 22 39357800 Ext: 6806 [email protected]

Please refer to important disclosures at the end of this report

Glaxo | 3QCY2011 Result Update

Exhibit 1: 3QCY2011 Standalone performance

Y/E Dec (` cr) Net sales Other income Total income Gross profit Gross margin Operating profit Operating margin (%) Interest Depreciation & amortisation PBT & Exceptional Items Less : Exceptional Items Profit before tax Provision for taxation Profit before exceptional items Net profit after exceptional items EPS (`)
Source: Company, Angel Research

3QCY2011 608 44 652 364.8 60.0 176 29.0 5 215 215 69 146 146 17.2

2QCY2011 560 42 602 354 63.2 186 33.2 5 223 223 73 150 150 17.4

% chg (qoq) 8.4 4.7 8.2 3.0 (5.3) (0.6) (3.5) (3.5) (4.6) (2.9) (2.9)

3QCY2010 582 33 615 367 63.0 209 35.9 4 237 237 79 158 158 18.7

% chg (yoy) 9MCY2011 9MCY2010 4.4 34.6 6.0 (0.5) (15.7) 19.5 (9.3) (9.3) (12.6) (7.7) (7.7) 1,771 144 1,915 1,091 61.6 573 32.3 14 703 (190) 513 218 294 484 57.1 1,621 106 1,727 1,029 63.5 590 36.4 12 685 (11) 674 227 446 446 52.7

% chg 9.2 35.6 10.9

(3.0) 19.7 2.6 (23.9) (3.9) (34.1) 8.4

Exhibit 2: 3QCY2011 Actual vs. Angel estimates

(` cr) Net sales Other income Operating profit Tax Adj. net profit
Source: Company, Angel Research

Actual

Estimates

Variation (%)

608 44.1 176.0 69.2 146.0

643 42.1 203 78.0 162.1

(5.6) 4.8 (13.3) (11.3) (9.9)

Revenue grew by 4.4%, below our estimates

For 3QCY2011, Glaxo reported 4.4% yoy growth in its net sales to `608cr, lower than our estimate of `643cr. Sales of the companys core pharmaceuticals business grew by 6.5% in 3QCY2011.

November 16, 2011

Glaxo | 3QCY2011 Result Update

Exhibit 3: Sales trend

700 600 498 500 400 300 200 100 0 2QCY20103QCY20104QCY20101QCY20112QCY20113QCY2011
Sales Growth (YoY)

35.0 582 491 603 560 608 30.0 25.0 20.0 15.0 10.0 5.0 0.0 (5.0)

Source: Company, Angel Research

OPM dips by 680bp

For 3QCY2011, the companys gross margin came in at 60.0%. Consequently, the company reported a dip of 689bp yoy in OPM to 29.0%, below our estimate of 32.4%. During the quarter, employee and other expenses increased by 15.5% yoy to `66.1cr and 21.8% yoy to `122.7cr, respectively.

Exhibit 4: OPM trend

40.0 36.5 35.0 30.0 30.0 33.2 29.0 35.9 35.0

25.0

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

Source: Company, Angel Research

Net profit in below estimates

During the quarter, Glaxo reported a 7.7% yoy dip in its net profit to `146cr, below our expectation of `162cr. The decline in the companys net profit can be attributed to lower-than-expected OPM during the quarter.

November 16, 2011

3QCY11

Glaxo | 3QCY2011 Result Update

Exhibit 5: Adjusted net profit trend

200 158 150 140 122 100 186 150 146

50

0 2QCY2010 3QCY2010 4QCY2010 1QCY2011 2QCY2011 3QCY2011

Source: Company, Angel Research

November 16, 2011

Glaxo | 3QCY2011 Result Update

Recommendation rationale
Renewed focus on the Indian market: Glaxo is among the top five players in the Indian market, having a market share of ~5%. Post the IPR regime, the company has renewed its focus on the domestic market with the launch of five patented products (mainly Tykerb and Rotarix) in the last two years. In CY2011, the company plans to launch 46 branded generic products, two oncology products and Synflorix vaccine. During 1QCY2011, the company launched two new products namely the branded generic Calpol-T in the fast growing pain segment and Ansolar (Sunscreen gel), which is a product from the Stiefel dermatology range. The company has also received marketing approvals for two innovative products namely Votrient for renal carcinoma and Revolade for platelet depletion. New product launches since CY2007 accounted for 26% yoy top-line growth registered by the company in CY2010. Further, in-line with market dynamics, Glaxo has launched patented products at discounts in India compared to other markets. During 1QCY2011, the company added 550 MRs, taking its total strength to 3,450. For CY2011, the company expects total pharma sales to increase by 14.5% yoy, with operating margin at 3335%.

Outlook and valuation:

Glaxo has a strong balance sheet with cash of `2,000cr (~10% of market cap), which could be used for future acquisitions or higher dividend payouts. We expect Glaxos net sales to post a 13.9% CAGR to `2,788cr and EPS to register a 14.6% CAGR to `86.9 over CY201012E. At current levels, the stock is trading 27.5x and 22.8x CY2011E and CY2012E earnings, respectively. We continue to maintain our estimates and, hence, remain Neutral on the stock.

Exhibit 6: Key assumptions

CY2011E Domestic sales growth (%) Export sales growth (%) Growth in employee expenses (%) Operating margin (%) Capex (` cr)
Source: Company, Angel Research

CY2012E 14.3 18.0 14.9 35.5 20.0

14.5 20.0 24.1 35.5 20.0

November 16, 2011

Glaxo | 3QCY2011 Result Update

Exhibit 7: One-year forward PE

2500 2000 1500 1000 500 0

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

15x

20x

25x

30x

Source: Company, Angel Research

Exhibit 8: Recommendation summary

Company Alembic Pharmaceuticals Aurobindo Pharma# Aventis* Cadila Healthcare Cipla Dr. Reddy's Dishman Pharma Glaxo* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Reco Buy Buy Sell Buy Buy Buy Buy Neutral Buy Buy Buy Buy Buy CMP (`) 42 92 2,345 723 310 1,614 43 1,982 399 250 456 153 473 Tgt. price Upside (`) 77 166 1,937 965 369 1,920 68 555 358 593 270 577 % PE (x) 82.5 80.5 (17.4) 26.8 19.0 19.0 59.3 39.0 34.0 30.1 76.5 22.2 5.5 6.7 26.1 15.8 16.8 16.8 3.8 22.8 7.2 9.7 15.4 4.1 9.0 FY2013E EV/Sales (x) 0.7 0.8 3.3 2.4 3.1 2.9 0.9 5.2 0.9 1.5 2.5 1.5 1.7 EV/EBITDA (x) 4.9 5.8 21.6 12.8 14.4 11.6 5.0 14.5 5.9 6.9 12.8 6.9 7.3 FY11-13E CAGR in EPS (%) 30.6 9.9 15.4 19.4 23.8 22.7 3.5 14.6 15.6 14.8 24.0 29.6 22.0 FY2013E RoCE (%) RoE (%) 26.6 10.2 15.7 25.2 16.6 17.7 7.1 41.0 14.2 23.3 23.9 11.7 26.8 37.0 15.1 17.1 31.1 18.2 25.2 8.8 30.7 16.9 24.9 30.8 23.4 25.9

Source: Company, Angel Research; Note: * December year ending;#CAGR in EPS is based on recurring EPS

November 16, 2011

Jul-11

Glaxo | 3QCY2011 Result Update

Profit & loss statement

Y/E Dec (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & amortisation EBIT % chg (% of Net Sales) Interest & other charges Other income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earn of associate Less: Minority interest (MI) Prior period items Exceptional items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully diluted EPS (`) % chg CY2007 CY2008 CY2009 CY2010 CY2011E CY2012E 1,748 140 1,608 4 1,612 1.1 1,093 637 72 151 233 516 7.3 32.1 21 495 7.5 30.8 1 134 633 11.6 (138) 770 218 28.3 553 553 415 12.8 34.4 65 65 0.2 1,787 94 1,693 3 1,696 5.2 1,098 656 97 173 173 595 15.5 35.2 16 579 17.0 34.2 1 120 701 10.8 (128) 829 238 28.7 591 591 463 11.6 34.9 70 70 7.0 1,950 43 1,908 3 1,910 12.6 1,234 702 109 209 213 674 13.2 35.3 16 658 13.6 34.5 101 761 8.6 (7) 769 261 33.9 508 508 500 8.1 26.6 60 60 (14.1) 2,195 44 2,151 5 2,156 12.9 1,392 788 126 241 237 759 12.5 35.3 18 741 12.7 34.4 1 126 872 14.5 18 854 293 34.4 561 561 578 15.5 26.1 66 66 10.4 2,494 47 2,447 5 2,452 13.7 1,577 887 87 299 305 870 14.7 35.5 17 852 15.0 34.8 113 971 11.4 971 342 35.2 629 186 443 443 (23.4) 18.1 72 72 8.8 737 737 66.4 26.4 87 87 20.7 2,842 54 2,788 5 2,793 13.9 1,798 1,008 99 344 347 991 13.9 35.5 18 972 14.1 34.9 122 1,100 13.3 1,100 363 33.0 737 -

November 16, 2011

Glaxo | 3QCY2011 Result Update

Balance Sheet
Y/E Dec (` cr) SOURCES OF FUNDS Equity share capital Preference capital Reserves& surplus Shareholders funds Minority Interest Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net block Capital work-in-progress Goodwill Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Mis. Exp. not written off Total Assets 1,346 566 155 163 249 640 (73) 1,366 730 1,452 957 204 291 730 721 1,551 148 2,183 1,734 138 311 699 1,484 1,747 118 2,510 2,003 174 333 845 1,665 1,900 118 2,698 2,042 240 416 741 1,957 2,208 118 3,144 2,396 273 475 864 2,280 2,533 311 223 87 5 326 236 90 10 333 241 93 21 363 254 109 9 383 271 111 21 403 290 113 21 6 (20) 1,366 6 (30) 1,551 5 (45) 1,747 5 (57) 1,900 5 (35) 2,208 5 (35) 2,533 85 1,296 1,381 85 1,491 1,575 85 1,701 1,786 85 1,867 1,952 85 2,153 2,238 85 1 2,476 2,562 CY2007 CY2008 CY2009 CY2010 CY2011E CY2012E

November 16, 2011

Glaxo | 3QCY2011 Result Update

Cash flow statement

Y/E Dec (` cr) PBT and exceptionals Depreciation (Inc)/Dec in working capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in fixed assets (Inc.)/Dec. in investments Other income Cash Flow from Investing Issue of equity Inc./(Dec.) in loans Dividend paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in cash Opening cash balances Closing cash balances
CY2007 CY2008 CY2009 CY2010 CY2011E CY2012E 628 21 7 134 252 269 (15) 31 134 150 297 (597) (300) 119 36 155 701 16 (33) 120 246 319 (24) 120 96 (355) 742 387 802 155 957 761 16 20 101 185 511 (21) (580) 101 (500) (394) 1,160 766 777 957 1,734 872 18 88 126 314 538 (20.6) (30) 126 75 0.26 (296) (48) (344) 269 1,734 2,003 971 17 (253) 113 370 251 (33) 113 81 (293) (293) 39 2,003 2,042 1,099 18 31 122 423 604 (20) 122 102 (354) (354) 353 2,042 2,396

November 16, 2011

Glaxo | 3QCY2011 Result Update

Key ratio
Y/E Dec Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Returns (%) RoCE (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) 5.3 52 11 77 101 5.3 48 10 80 98 5.8 47 11 81 90 6.2 46 9 82 81 6.6 45 11 76 87 7.1 44 14 69 92 38.8 32.1 39.7 31.3 39.9 29.8 40.6 30.9 41.5 21.1 41.0 30.7 65.2 65.2 67.7 36.0 163.0 69.8 69.8 71.7 40.0 186.0 60.0 60.0 61.9 30.0 210.9 66.2 66.2 68.3 40.0 230.4 72.0 72.0 54.3 34.6 264.2 86.9 86.9 89.1 41.7 302.5 30.7 29.6 12.3 1.8 10.5 32.7 12.3 28.7 28.0 10.8 2.0 9.5 26.9 10.3 33.5 32.4 9.5 1.5 8.0 22.6 8.7 30.3 29.4 8.7 2.0 7.0 19.8 7.9 27.9 36.9 7.6 1.7 6.1 17.2 6.8 23.1 22.5 6.6 2.1 5.2 14.7 5.8 CY2007 CY2008 CY2009 CY2010 CY2011E CY2012E

November 16, 2011

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Glaxo | 3QCY2011 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Glaxo Pharma No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

November 16, 2011

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