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GLAXOSMITHKLINE PHARMACEUTICALS LTD : SELL
GLAXOSMITHKLINE PHARMACEUTICALS LTD : SELL
GLAXOSMITHKLINE PHARMACEUTICALS LTD : SELL
GLAXOSMITHKLINE PHARMACEUTICALS LTD : SELL
GLAXOSMITHKLINE PHARMACEUTICALS LTD : SELL
GLAXOSMITHKLINE PHARMACEUTICALS LTD : SELL
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GLAXOSMITHKLINE PHARMACEUTICALS LTD : SELL

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  • 1. October 07, 2010 GLAXOSMITHKLINE PHARMACEUTICALS LTD SELL Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs Established in the year 1924 in India GlaxoSmithKline Pharmaceuticals Ltd (GSK) is one Strong Buy of the oldest pharmaceuticals company. Its product range includes prescription medicines Buy Hold and vaccines. The prescription medicines range across therapeutic areas such as anti- Reduce infectives, dermatology, gynecology, diabetes, cardiovascular and respiratory diseases. Sell • GSK plans to launch at least two vaccines Infanrix Hexa and Synflorix in the next 12-18 Strong Buy – Expected Returns > 20% p.a. months. The company can also put to advantage the strong pipeline of vaccines of the Buy – Expected Returns from 10 to 20% p.a. Hold – Expected Returns from 0 % to 10% p.a. parent company GlaxoSmithKline Plc. Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk • In the dermatology segment, GSK is the market leader with a market share of 14%. Post Sell – Returns < 0 % the acquisition of Stiefel Laboratories; it would see launches in the area of cosmetology. • The company plans to launch three Oncology drugs which includes Votrient (for renal cancer) and Arzerra (for Leukemia) in CY10-CY11 which would have a market opportunity STOCK DATA BSE / NSE Code 500660/ GSKPHARMA of approximately Rs1bn. It also plans to launch Promacta by Q1FY11. Promacta is the first Bloomberg Code GLXO IN EQUITY oral medication to increase platelet production for people with serious blood disorder. No. of Shares (Mn) 85 Sensex / Nifty 20,543/6,186 • It is a debt free company with a cash balance of Rs 17.33bn and is looking for acquisition PRICE DATA of either company or brand that would add to the portfolio. CMP Rs (06th Oct'10) 2,286.0 Beta 0.26 • We expect GSK’s revenues to grow at a CAGR of 12.4% over CY2010-12 to Rs 27.08bn by Market Cap (Rs mn) 193,624 CY2012. We further estimate that the PAT would grow at a CAGR of 11.7% over CY2010- 52 Week High-low 2,349/1,425 Average Daily Volume 8,013 12 to Rs 7.35bn in CY2012 from Rs 5.89bn in CY2010. STOCK RETURN (%) 30D 3M 6M 1Y • Based on a consolidated CY12 P/E multiple of 23, the fair value for the GSK Pharma 19% 7% 30% 51% company works out to Rs 1996 Sensex 11% 17% 15% 21% Nifty 11% 17% 15% 23% Financial Snapshot SHARE HOLDING PATTERN (%) Projections (Rs Mn) CY08A CY09A CY10E CY11E CY12E Promoter 50.7 Institution 32.1 Revenue 16,990 19,099 21,433 24,152 27,080 Non Institution 17.3 Y-o-Y Growth % 6.0% 12.4% 12.2% 12.7% 12.1% Total 100.0 EBIDTA 8,403 7,927 9,155 10,353 11,251 1 Year Price Performance (Rel. to Sensex) Y-o-Y Growth % 1.4% -5.7% 15.5% 13.1% 8.7% 60 PAT 5,911 5,079 5,890 6,712 7,350 50 Sensex GSK Y-o-Y Growth % 7.9% -14.1% 16.0% 14.0% 9.5% 40 EPS Rs 69.8 60.0 69.5 79.2 86.8 30 BVPS Rs 186.0 210.9 232.7 258.4 286.5 20 EBIDTA % 49.5% 41.5% 42.7% 42.9% 41.5% NPM % 34.8% 26.6% 27.5% 27.8% 27.1% 10 ROE % 37.5% 28.4% 29.9% 30.7% 30.3% 0 PER x 32.9 28.8 26.3 -10 P/B Ratio 9.8 8.8 8.0 -20 www.fullertonsecurities.co.in Page | 1
  • 2. October 07, 2010 BUSINESS PROFILE GlaxoSmithKline Pharmaceuticals is among the top-5 players in the Indian market with market share of approximately 5%. It derives 96% of its revenue from India and remaining 4% from the export of Bulk drugs and Formulations to countries like Japan, Mexico, Indonesia, Korea and Jordan. It has two manufacturing units in India, located at Nashik and Thane as well as a clinical development centre at Bangalore. The company’s product range includes prescription medicines and vaccines. Augmentin is currently largest selling antibiotic The prescription medicines range across therapeutic areas such as Anti-infectives, dermatology, gynecology, diabetes, with sales of Rs 1.4bn cardiovascular disease (CVS) and respiratory diseases. The company intends to focus on high growth segments such as CNS, CVS and diabetology. GSK is currently the leader in the Dermatology category with 14% market share and key products such as Betnovate, Zovirax, Zimig and Tenovate. The parent company has acquired Stiefel Laboratories and GSK India is expected to benefit from it and is expected to launch products in the cosmetology. In the Vaccines business, GSK offers a range of vaccines, for the prevention of hepatitis A, hepatitis B, invasive disease caused by influenza, chickenpox, diphtheria, pertussis, tetanus and others. Rotarix, a vaccine for rotaviral diarrhea and Cervarix, a vaccine for prevention of cervical cancer, was launched during the year. In the OTC Segment, the company derives 4.5% of its revenue from the Brand Iodex which is manufactured by GSK Pharmaceuticals and is distributed by GSK consumer Healthcare. The Indian Pharmaceutical industry continues to remain under price control and currently 74 products are under price control and currently 26% of the GSK revenues are under price control. The industry also faces suo moto drug price reductions by the Government from time to time. Glaxosmithkline Revenue Segmentation Plc Iodex Exports 4% 4% Glaxo Group Ltd Horlicks Limited GSK Asia Ltd. Pharmaceuticals GSK Pharma GSK Consumer 92% (52%) HC (43%) Prescription Vaccine New products to drive future growth … The company has plans to launch two vaccines namely Infanrix Hexa and Synflorix over next two years. GSK has also plans For penetration led to launch its novel products namely Promecta (blood platelet booster), Votrient (for renal cancer) and Arzerra (for growth the company Leukemia). All these products are likely to be future growth drivers for the company. The company is planning to upgrade plans to hire MRs and its Nashik facility for which the company plans a capex of Rs 500-600mn over the next two years apart from the currently has a sales maintenance capex of Rs 400mn every year. force of 3,000 MRs www.fullertonsecurities.co.in Page | 2
  • 3. October 07, 2010 BUSINESS PERFORMANCE Lower sales growth... For the 2QCY10, the net sales increased by only 9% to Rs 4.98bn due to lower sales of vaccines. The sales of vaccines were impacted on account of constraints on supply. However, the availability of vaccines has improved by the end of New product launches since quarter. Revenues from Pharmaceuticals business has increased by 12% during the quarter. With expansion in CY07 accounted for 1/3rd of the growth margins of the pharmaceuticals business, operating profit margins have improved 150 bps to 37.7%; resulting operating profit to increase by 14% to Rs 1.91bn. EO expenses of Rs 106.2mn on the account of revised gratuity limits and actuarial charge on post-retirement benefits restricted growth in net profit to 4% at Rs 1.29bn. Quarterly Performance Revenue, Operating & PAT Margin 6000 70% 30,000 60% 5000 60% 25,000 50% Revenues (Rs mn) 50% 4000 Margins(%) 20,000 40% 40% 3000 15,000 30% 30% 2000 20% 10,000 20% 1000 10% 5,000 10% 0 0% - 0% CY07A CY08A CY9A CY10E CY11E CY12E Net Revenue (Rs mn) EBITDA Margins Revenue (Rs Mn) EBIDTA Margin PAT Margin Peer Group Comparison Revenue EBIDTA PAT Margin ROE P/E P/B CMP FV Companies (Rs. mn) Margin (%) (%) (%) (x) (x) (Rs.) (Rs.) GSK Pharma 19099 42% 27% 28% 38.1 10.8 2286 10 Novartis 6239 29% 19% 19% 17.7 3.4 626 5 Pfizer 8089 27% 17% 13% 25.2 3.3 1103 10 Aventis Pharma 9748 27% 16% 18% 26.7 4.9 1935 10 Peer Comparison GSK operates at robust margins. GSK commands a premium in valuation compared to its peers because of the stable business model with a strong balance sheet position and profitability. The company is significantly ahead of others MNC players in terms of its brand franchise and field force presence and has a strong product pipeline The stock trades at P/E of support from the parent company. There is lower risk to GSK’s revenue and earnings vis-à-vis Indian generic 38.1 and is expensive on the companies because the Indian generic companies operate across several geographies, giving rise to risk of valuation front. exchange rates and regulatory actions while GSK pharma derives 96% of its revenues from the Indian market. www.fullertonsecurities.co.in Page | 3
  • 4. October 07, 2010 VALUATION We expect GSK’s revenues to grow at a CAGR of 12.4% over CY2010-12 to Rs 27.08bn by CY2012. We further Based on a consolidated CY12 P/E multiple of 23, the estimate that the PAT would grow at a CAGR of 11.7% over CY2010-12 to Rs 7.35bn in CY2012 from Rs 5.89bn in fair value for the company CY2010. works out to Rs 1996 Based on a consolidated CY12 P/E multiple of 23, the fair value for the company works out to Rs 1996 We recommend a ‘SELL’ rating on the stock. Financial Analysis and Projections Particulars (Rs Mn) CY08A CY09A CY10E CY11E CY12E Net Revenue 16,990 19,099 21,433 24,152 27,080 Other Income 3,100 1,816 2,042 2,042 2,042 Total Income 20,090 20,915 23,475 26,194 29,122 Operating Expenditure 11,688 12,988 14,320 15,841 17,871 Depreciation 163 164 222 249 270 EBIT 8,239 7,763 8,933 10,104 10,981 EBIT Margin (%) 48.5% 40.6% 41.7% 41.8% 40.6% Interest 5 4 3 3 2 Profit Before Tax 8,234 7,760 8,930 10,101 10,979 Less: Tax 2,323 2,681 3,041 3,389 3,628 PAT 5,911 5,079 5,890 6,712 7,350 PAT Margin (%) 34.8% 26.6% 27.5% 27.8% 27.1% ROE (%) 37.5% 28.4% 29.9% 30.7% 30.3% EPS (Rs) 69.8 60.0 69.5 79.2 86.8 BVPS (Rs) 186.0 210.9 232.7 258.4 286.5 Valuation Ratios (x) CY10E CY11E CY12E P/E 32.9 28.8 26.3 P/B 9.8 8.8 8.0 www.fullertonsecurities.co.in Page | 4
  • 5. October 07, 2010 Board of Directors Director Name Current Position Description Mr. Deepak S. Parekh Chairman Mr. Deepak S. Parekh serves as Non-Executive Independent Chairman of the Board of Glaxosmithkline Pharmaceutical Limited. Mr. V. Thyagarajan Vice Chairman Mr. V. Thyagarajan serves as Non-Executive Vice Chairman of the Board of Glaxosmithkline Pharmaceutical Limited. Dr. Hasit B. Joshipura serves as Managing Director and Executive Director of Glaxosmithkline Pharmaceutical Limited. Dr. Joshipura is a graduate in Electrical Engineering from VJTI - Bombay University and a Post Graduate from the Indian Institute of Management - Ahmedabad. He has completed his Doctorate programme at the School of Management at lIT Mumbai. After having spent about three years with Tata Administrative Services, Dr. Joshipura spent about 16 years with the Unilever Group of companies in India and held positions of increasing responsibility in commercial, sales, marketing and business management functions. He joined the pharmaceutical business of Johnson & Johnson Limited as President & Executive Director in October 2001. Dr. Joshipura was the Chair Dr. Hasit B. Joshipura Managing Director person for the Corporate Contributions Programme, as well as the lead for Government Affairs for the Johnson & Johnson group of businesses in India. In October 2006, Dr. Joshipura was appointed Vice President and General Manager designate India, Bangladesh and Sri Lanka and took over as Managing Director of the Company from lS January 2007. He is an Executive Committee Member of the Organisation of Pharmaceutical Producers of India (OPPI) and has been nominated by the Board of Governors of VJTI to their Senate. Dr. Joshipura is a Director of Biddle Sawyer Limited which forms a part of the GlaxoSmithKline Group Companies in India and is a member of the Investors/Shareholders Grievance Committee of the Company. Mr. R.R. Bajaaj serves as a Non-Executive Independent Director of Glaxosmithkline Pharmaceutical Limited. Mr. Bajaaj is a graduate in Science and Law. He joined Mahindra & Mahindra Limited as Management Trainee in 1964. He then moved on to Otis Elevator Company (India) Limited in their Field Operations Department in 1967 and held a series of increasingly senior roles within that Company including Head of Northern Regional Operations, Country Head for Middle East and South East Asia countries. Mr. Bajaaj returned to India as Managing Director of Otis Elevator Company (India) Limited in 1989. In 2000, he was appointed as Vice-President Mr. R.R. Bajaaj Independent Director South and South East Asia operations based in Singapore. In 2001, he took up international assignment with an NGO Special Olympics Inc. as Managing Director, Asia Pacific. In 2006, he entered into a Joint Venture with the Consulting Firm for Vertical Transportation, Lerch Bates which is Head quartered in Denver, U.S. He is a Director of the Company since October 2002 and is member of the Audit Committee and Investor/Shareholders Grievance Committee. He is also a Director in HDFC Asset Management Company Limited and in APW President Systems Limited. Dr. A. Banerjee serves as Executive Director - Technical, Director of Glaxosmithkline Pharmaceutical Limited. Dr. Banerjee is a Ph.D. in Executive Director - Organic Chemistry and has carried out post-doctoral research at Glasgow University. He joined the Company as a Management Trainee Dr. A. Banerjee Technical and has held various increasingly senior positions in the manufacturing and technical functions. Dr. Banerjee is a Director of Biddle Sawyer Limited which forms part of the GlaxoSmithKline Group Companies in India. Mr. M.B. Kapadia serves as Senior Executive Director - Finance, Corporate Communications, Secretarial & Administration, Director of Glaxosmithkline Pharmaceutical Ltd. He is a member of the Institute of Chartered Accountants of India and of the Institute of Company Secretaries of India. He has been in the service of the Company since May 1987 and has held increasingly senior positions in the Executive Director - Mr. M.B. Kapadia Finance and Secretarial functions. He was elevated to the Board in 1996. He is currently Senior Executive Director in charge of Finance, Finance Company Secretarial, Corporate Communications and Administration. He has total work experience of 25 years. Mr. Kapadia is a Director of Biddle Sawyer which forms part of the GlaxoSmithKline Group Companies in India and is member of the Investor/Shareholders Grievance Committee. Mr. Nihal Vijaya Devadas Kaviratne, CBE., serves as a Non-Executive Independent Director of Glaxosmithkline Pharmaceutical Limited. Mr. Kaviratne has an Honours degree in Economics from Mumbai University. His global career with Unilever spanned 40 years. He joined them in India as a Management Trainee in 1966, and held a series of increasing senior roles including Head of Marketing Research and Economics and General Manager of Export Division. In 1984 he moved as Managing Director of the Detergents Division in Indonesia, and later became Regional Leader for Latin America and South Asia at Corporate Headquarters in London, Managing Director in Argentina, and Chairman in Indonesia. He was appointed Senior Vice President - Development and Environmental Affairs, Mr. Nihal Vijaya Devadas Unilever Asia, based in Singapore and Chairman of Unilever’s Home and Oral Care businesses in Asia. He was awarded the CBE for Independent Director Kaviratne services to UK business interests and for sustainable development in Indonesia. He is a Director of the Company since July 2005. Mr. Kaviratne is a Director of Titan Industries Limited, Agro Tech Foods Limited and Fullerton India Credit Company Limited. He is also Chairman of TVS Indonesia, and Director of StarHub Limited, TVS Motor Company (Europe) BV The Netherlands and of Wildlife Reserves Singapore. He is the Chairman of the Audit Committee of Titan Industries Limited and a Member of the Audit Committee of Agro Tech Foods Limited, Fullerton India Credit Company Limited and StarHub Limited. Mr. Kaviratne is a Member of Investor Grievance Committee of Agro Tech Foods Limited. He is a Founding Member of the Executive of APABIS (Asia Pacific Academy of Business in Society), Founder of St. Jude India ChildCare Centres, and is Vice Chairman of the Indian Cancer Society. www.fullertonsecurities.co.in Page | 5
  • 6. October 07, 2010 Board of Directors (Contd) Mr. P.V. Nayak serves as Non-Executive Independent Director of Glaxosmithkline Pharmaceutical Limited. Mr. Nayak joined the Company in 1989 and was elevated to the Board in 1992. At the time of his retirement from service on 30th September 2003, he was Senior Executive Director in charge of Human Resources, Legal and Licensing, Corporate Communications, Administration and Agrivet Farm Care business. Earlier, he was also in charge of the Qualigens Fine Chemicals business. He was appointed as Non-Executive Mr. P.V. Nayak Independent Director Director of the Company from 9th October 2003. At present, he holds 576 shares of the Company. Mr. Nayak is a Director of Siemens Limited, Siemens Healthcare Diagnostics Limited, Virbac Animal Health India Private Limited and Fortis Trustee (India) Private Limited. He is the Chairman of the Investor Grievance Committee and a Member of Audit Committee of Siemens Healthcare Diagnostics Limited. Mr. Nayak is a Member of the Investor Grievance Committee of Siemens Limited. Mr. V. Narayanan serves as Non-Executive Independent Director of Glaxosmithkline Pharmaceutical Limited. Mr. Narayanan has more than 48 years of experience in Management. He joined Hindustan Lever Limited as a Management Trainee and held several positions in that company both in India and in the U.K. Subsequently he joined Pond’s (India) Limited and was its Chairman and Managing Director for over 15 years. He is a Director of the Company since May 1995. Mr. Narayanan is the Chairman on the Board of M M Forgings Limited and Pond’s Exports Limited and is a Director of Samtel Colour Limited, Hindustan Unilever Limited, Sundram Fasteners Limited, UCAL Mr. V. Narayanan Independent Director Fuel Systems Limited, Samcor Glass Limited, Tamilnadu News Print & Papers Limited, Rane Holdings Limited, Rane (Madras) Limited and Bata India Limited. He is also a Director of Lafarge India Private Limited. Mr. Narayanan is the Chairman of the Audit Committee of M M Forgings Limited, Bata India Limited, UCAL Fuel Systems Limited and Tamilnadu News Print & Papers Limited and a Member of the Audit Committee of Rane (Madras) Limited and Sundram Fasteners Limited. He is also a Member of the Remuneration Committee of Bata India Limited and Hindustan Unilever Limited. A. M. Nimbalkar Independent Director A. M. Nimbalkar currently serves as an Independent Director in the board of GlaxoSmithKline Pharmaceuticals Ltd Mr. D. Sundaram is Non-Executive Independent Director of GlaxoSmithKline Pharmaceuticals Ltd., since July 27, 2009. He is a Commerce Graduate with a Post Graduate in Management Studies from Chennai. He is a fellow of the Institute of Cost and Management Accounts and has attended the Advanced Management Programme at Harvard Business School. Mr. Sundaram joined the Unilever group in India as Management Trainee in 1975 and has held increasingly senior roles within the Unilever group including Accounting, Commercial and Treasury at Mumbai, Finance Officer at Unilever (London) for Africa and Middle East Region, Finance Director and Board Member of Brooke Bond Lipton India Limited and Senior Vice-President (Finance), South Asia and Middle East Mr. D. Sundaram Independent Director Group based at London. Mr. Sundaram was appointed as Finance Director and Board Member of Hindustan Unilever Limited and subsequently elevated to Vice-Chairman and was also responsible for Pakistan, Bangladesh and Sri Lanka. Mr. Sundaram was awarded CFO of the year for the FMCG sector by CNBC TV 18 in 2006 and 2009. He has joined TVS Capital Funds Limited as Vice-Chairman and Managing Director from 10 th July 2009. He is an Independent Director on the Board of State Bank of India, SBI Capital Market, TVS Electronics Ltd and Member of the Board of Governors of Institute of Financial Management and Research, Chennai. He is the Chairman of the Audit Committee of SBI Capital Market Ltd. He is a Member of Audit Committee of TVS Electronics Ltd and a Member of the Investor Grievance Committee of State Bank of India. Mr. Ronald C. Sequeira serves as a Executive Director - Human Resources, Director of Glaxosmithkline Pharmaceutical Limited. Mr. Sequeira is an alumni of Loyola College, Chennai and XLRI, Jamshedpur and has 26 years of experience in the field on Human Resources with multinational companies in India. He began his HR career in 1984 as a Management Trainee with Union Carbide India Limited and gained employee relations experience in various positions. He was appointed Personnel Manager in 1990. In 1992, he moved to the Executive Director - HSBC Bank where he handled HR for East and West India and headed Resourcing and Development and later he was appointed HR Mr. Ronald C. Sequeira Human Resources Manager Asia Pacific, based in Hong Kong. Mr Sequeira has also held the position of Head of Compensation and Employee Relations with HSBC, India. Mr. Sequiera joined Tata Power Company in 2004 as VP and Head of Human Resources with additional charge for the Company’s Corporate Social Responsibility function. He was also on the Tata Group’s HR steering Committee. He is a Director of Biddle Sawyer which forms part of the GlaxoSmithKline Group Companies in India. He is also a Director in Hill Properties Limited. www.fullertonsecurities.co.in Page | 6

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