glaxosmithkline pharmaceuticals ltd : sell

October 07, 2010

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GLAXOSMITHKLINE PHARMACEUTICALS LTD SELL Established in the year 1924 in India GlaxoSmithKline Pharmaceuticals Ltd (GSK) is one

of the oldest pharmaceuticals company. Its product range includes prescription medicines

and vaccines. The prescription medicines range across therapeutic areas such as anti-

infectives, dermatology, gynecology, diabetes, cardiovascular and respiratory diseases.

• GSK plans to launch at least two vaccines Infanrix Hexa and Synflorix in the next 12-18

months. The company can also put to advantage the strong pipeline of vaccines of the

parent company GlaxoSmithKline Plc.

• In the dermatology segment, GSK is the market leader with a market share of 14%. Post

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

of approximately Rs1bn. It also plans to launch Promacta by Q1FY11. Promacta is the first oral medication to increase platelet production for people with serious blood disorder.

• It is a debt free company with a cash balance of Rs 17.33bn and is looking for acquisition

of either company or brand that would add to the portfolio.

• We expect GSK’s revenues to grow at a CAGR of 12.4% over CY2010-12 to Rs 27.08bn by

CY2012. We further 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 CY2010.

• Based on a consolidated CY12 P/E multiple of 23, the fair value for the

company works out to Rs 1996

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Sensex GSK

Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs

Strong Buy

Buy

Hold

Reduce

SellStrong Buy – Expected Returns > 20% p.a.

Buy – Expected Returns from 10 to 20% p.a.

Hold – Expected Returns from 0 % to 10% p.a.

Reduce – Expected Returns from 0 % to 10% p.a. with possible downside

risk

Sell – Returns < 0 %

Financial SnapshotProjections (Rs Mn) CY08A CY09A CY10E CY11E CY12E

Revenue 16,990 19,099 21,433 24,152 27,080

Y-o-Y Growth % 6.0% 12.4% 12.2% 12.7% 12.1%

EBIDTA 8,403 7,927 9,155 10,353 11,251

Y-o-Y Growth % 1.4% -5.7% 15.5% 13.1% 8.7%

PAT 5,911 5,079 5,890 6,712 7,350

Y-o-Y Growth % 7.9% -14.1% 16.0% 14.0% 9.5%

EPS Rs 69.8 60.0 69.5 79.2 86.8

BVPS Rs 186.0 210.9 232.7 258.4 286.5

EBIDTA % 49.5% 41.5% 42.7% 42.9% 41.5%

NPM % 34.8% 26.6% 27.5% 27.8% 27.1%

ROE % 37.5% 28.4% 29.9% 30.7% 30.3%

PER x 32.9 28.8 26.3

P/B Ratio 9.8 8.8 8.0

STOCK DATABSE / NSE Code

Bloomberg Code

No. of Shares (Mn)

Sensex / Nifty

PRICE DATA

CMP Rs (06th Oct'10)

Beta

Market Cap (Rs mn)

52 Week High-low

Average Daily Volume

STOCK RETURN (%)

30D 3M 6M 1Y

GSK Pharma 19% 7% 30% 51%

Sensex 11% 17% 15% 21%

Nifty 11% 17% 15% 23%

SHARE HOLDING PATTERN (%)

Promoter

Institution

Non Institution

Total

1 Year Price Performance (Rel. to Sensex)

500660/ GSKPHARMA

GLXO IN EQUITY

85

20,543/6,186

2,286.0

32.1

17.3

100.0

0.26

193,624

2,349/1,425

8,013

50.7

October 07, 2010


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.

The prescription medicines range across therapeutic areas such as Anti-infectives, dermatology, gynecology, diabetes,

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.

Augmentin is currently largest selling antibiotic with sales of Rs 1.4bn

For penetration led

growth the company

plans to hire MRs and

currently has a sales

force of 3,000 MRs

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

to launch its novel products namely Promecta (blood platelet booster), Votrient (for renal cancer) and Arzerra (for

Leukemia). All these products are likely to be future growth drivers for the company. The company is planning to upgrade

its Nashik facility for which the company plans a capex of Rs 500-600mn over the next two years apart from the

maintenance capex of Rs 400mn every year.

BUSINESS PROFILE

Pharmaceuticals

92%

Iodex

4%

Exports

4%

Revenue SegmentationGlaxosmithkline

Plc

GSK Asia Ltd.

GSK Pharma (52%)

Prescription Vaccine

GSK Consumer HC (43%)

Glaxo Group Ltd Horlicks Limited

October 07, 2010


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

quarter. Revenues from Pharmaceuticals business has increased by 12% during the quarter. With expansion in

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.

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

support from the parent company. There is lower risk to GSK’s revenue and earnings vis-à-vis Indian generic

companies because the Indian generic companies operate across several geographies, giving rise to risk of

exchange rates and regulatory actions while GSK pharma derives 96% of its revenues from the Indian market.

BUSINESS PERFORMANCE

New product launches since CY07 accounted for 1/3rd of the growth

The stock trades at P/E of 38.1 and is expensive on the valuation front.

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Margins(%

)

Revenues (Rs mn)

Quarterly Performance

Net Revenue (Rs mn) EBITDA Margins

Peer Group Comparison

CompaniesRevenue

(Rs. mn)

EBIDTA

Margin (%)

PAT Margin

(%)

ROE

(%)

P/E

(x)

P/B

(x)

CMP

(Rs.)

FV

(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

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30%

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50%

60%

-

5,000

10,000

15,000

20,000

25,000

30,000

CY07A CY08A CY9A CY10E CY11E CY12E

Revenue, Operating & PAT Margin

Revenue (Rs Mn) EBIDTA Margin PAT Margin

October 07, 2010


Based on a consolidated

CY12 P/E multiple of 23, the

fair value for the company

works out to Rs 1996

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

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

CY2010.

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 ProjectionsParticulars (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

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 Managing Director

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

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 Independent Director

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

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. BanerjeeExecutive Director -

Technical

Dr. A. Banerjee serves as Executive Director - Technical, Director of Glaxosmithkline Pharmaceutical Limited. Dr. Banerjee is a Ph.D. in

Organic Chemistry and has carried out post-doctoral research at Glasgow University. He joined the Company as a Management Trainee

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. KapadiaExecutive Director -

Finance

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

Finance and Secretarial functions. He was elevated to the Board in 1996. He is currently Senior Executive Director in charge of 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

KaviratneIndependent Director

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,

Unilever Asia, based in Singapore and Chairman of Unilever’s Home and Oral Care businesses in Asia. He was awarded the CBE for

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.

October 07, 2010


Board of Directors (Contd)

Mr. P.V. Nayak Independent Director

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

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 Independent Director

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 MM Forgings Limited

and Pond’s Exports Limited and is a Director of Samtel Colour Limited, Hindustan Unilever Limited, Sundram Fasteners Limited, UCAL

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 Independent Director

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

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. SequeiraExecutive Director -

Human Resources

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

HSBC Bank where he handled HR for East and West India and headed Resourcing and Development and later he was appointed HR

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.

glaxosmithkline pharmaceuticals ltd : sell

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