2QCY2011 Result Update | Pharmaceutical

August 10, 2011

GlaxoSmithKline Pharma
Performance Highlights
Y/E Dec. (` cr) Net sales Other income Gross profit Operating profit Reported net profit
Source: Company, Angel Research

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 17,975 0.2 2,475/1,850 5,196 10 17,131 5,161 GLAX.BO GLXO@IN

`2,122 -

2QCY2011 1QCY2011 % chg (qoq) 2QCY2010 % chg (yoy) 560 42 354 186 148 603 58 372 211 0.5 (7.1) (27.4) (4.9) (11.9) 29,408.0 498 30 324 182 129 12.5 41.3 9.3 2.3 14.4

GlaxoSmithKline Pharma (Glaxo) reported its 2QCY2011 results, which were mostly in-line with our estimates on the top-line and PAT level. However, the companys OPM came in lower than our expectation at 33.2% (estimated 34.7%). We remain Neutral on the stock. Lower-than-expected performance on the on the operating front: Glaxo reported net sales of `560cr (`498cr), up 12.5% yoy, in-line with our estimates of `563cr. Gross margin at 63.2% was mostly in-line with our expectations; however, OPM at 33.2% (36.5%) was below our estimate of 34.7%. The company reported net profit of `148cr (`129cr), growth of 14.4% yoy. This was broadly in-line with our expectation of `154.4cr. The company reported net profit growth on the back of higher-than-expected other income, despite lower-than-expected OPM. Outlook and valuation: We expect 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 at 29.5x and 24.4x CY2011E and CY2012E earnings, respectively. We 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 17.8 17.1 14.4

Abs. (%) Sensex Glaxo

3m (7.5) (7.8)

1yr (6.0) 6.6

3yr 12.9 86.7

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 35.4 29.8 39.9 10.1 8.5 24.1

CY2010 2,151 12.8 561 10.4 66.2 35.3 32.1 30.9 40.6 9.2 7.4 21.1

CY2011E 2,447 13.8 443 (21.0) 72.0 35.5 29.5 21.1 41.5 8.0 6.5 18.3

CY2012E 2,788 14.0 737 66.4 86.9 35.5 24.4 30.7 41.0 7.0 5.6 15.7

Sarabjit Kour Nangra

+91 22 39357800 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Glaxo | 2QCY2011 Result Update

Exhibit 1: 2QCY2011 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

2QCY2011 560 42 602 354.3 63.2 186 33.2 5 223 (4) 227 73 152 148 17.4

1QCY2011 603 58 661 372 61.8 211 35.0 4 265 186 79 78 186 0.5 0.1

% chg (qoq) (7.1) (27.4) (8.9) (4.9) (11.9) 23.3 (15.8) 187.5 (7.0) (18.5) 29,408.0

2QCY2010 498 30 528 324 65.1 182 36.5 4 207 11 218 68 150 129 19.0

% chg (yoy) 1HCY2011 1HCY2010 12.5 41.3 14.1 9.3 2.3 21.7 7.5 4.2 7.0 1.0 14.4 1,163 100 1,263 727 62.5 397 34.1 9 488 182 670 151 338 148 17.5 1,039 74 1,113 662 63.7 382 36.7 8 448 458 146 302 291 34.4

% chg 12.0 36.1 13.5

3.9 14.3 9.0 46.2 3.3 11.9 (49.2)

11 1,612.6

Exhibit 2: 2QCY2011 Actual vs. Angel estimates

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

Actual

Estimates

Variation (%)

560 42.1 185.8 72.6 151.7

563 29.8 195 66.2 154.4

(0.4) 41.3 (4.8) 9.7 (1.8)

Revenue grew by 12.5%, just in-line with estimates

Glaxo reported net sales of `560cr (`498cr), up 12.5% yoy, in-line with our estimate of `563cr. Sales of the core pharmaceuticals and vaccines business grew by 14% in 2QCY2011. The companys growth has been in-line with market growth. In particular, oncology, dermatologicals and mass specialty therapies have grown well. In addition to the base effect, vaccines have shown strong market competitive growth. During the last quarter, Glaxo received marketing approvals for two innovative products, namely Votrient for renal carcinoma and Revolade for platelet depletion. During 2QCY2011, apart from two original products from the GSK pipeline in oncology and haematology, a branded generic and a product in Stiefel dermatology was launched during the quarter. Also, during 1QCY2011, the company had added 550 MRs, which took its total MR strength to 3,450, which along with the launch of patented products would aid the company to grow at least in-line with the industry.

August 10, 2011

Glaxo | 2QCY2011 Result Update

Exhibit 3: Sales trend

700 600 500 541 582 498 491 603 35.0 560 30.0 25.0 20.0

(` cr)

400 300 200 100 0

1QCY2010 2QCY2010 3QCY2010 Sales 4QCY2010 1QCY2011 2QCY2011 Growth (YoY)

(%)

15.0 10.0 5.0 0.0 (5.0)

Source: Company, Angel Research

OPM dips by 332bp yoy

For 2QCY2011, the companys gross margin came in at 63.2% (65.1%). Consequently, the company reported a dip of 332bp yoy in its OPM at 33.2% (36.5%), below our estimate of 34.7%. During the quarter, employee and other expenses increased by 22.5% yoy to `77.6cr (`63.4cr) and 15.1% yoy to `90.9cr (`79cr), respectively.

Exhibit 4: OPM trend

40.0 37.0 35.0 36.5 35.9 35.0 33.2 30.0 30.0

1QCY2011

Source: Company, Angel Research

Adjusted net profit in-line with estimates

The company reported net profit of `148cr (`129cr), registering 14.4% yoy growth. This was broadly in-line with our expectation of `154.4cr. Growth was despite lower-than-expected OPM on the back of higher-than-expected other income.

August 10, 2011

2QCY2011

1QCY10

2QCY10

3QCY10

4QCY10

(%)
25.0

Glaxo | 2QCY2011 Result Update

Exhibit 5: Adjusted net profit trend

200 161 150 140 122 158 186 152

(` cr)

100

50

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

Source: Company, Angel Research

August 10, 2011

Glaxo | 2QCY2011 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 had 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 have 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 had added 550 MRs, which took its total MR 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 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 at 29.8x and 24.4x CY2011E and CY2012E earnings, respectively. We 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

August 10, 2011

Glaxo | 2QCY2011 Result Update

Exhibit 7: One-year forward PE

2,500 2,000 1,500 1,000 500 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 Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Neutral Buy Buy Buy Buy Neutral Buy Accumulate Buy Buy Buy Neutral CMP Tgt. price (`) 156 2,050 850 298 1,486 76 2,122 395 318 462 179 495 481 (`) 278 1,053 377 1,920 133 658 358 593 373 593 Upside % PE (x) 77.8 23.8 26.4 29.2 75.7 66.5 12.5 28.4 107.9 19.7 8.2 22.8 16.6 16.2 15.5 6.5 24.4 6.0 11.5 15.6 4.8 9.4 20.4 FY2013E EV/Sales (x) 1.2 2.8 2.6 2.9 2.7 1.2 5.6 0.8 1.7 2.6 1.2 1.5 5.1 EV/EBITDA (x) 6.3 18.4 13.1 13.8 10.7 6.9 15.7 4.7 8.1 13.0 5.5 6.4 16.3 FY11-13E CAGR in EPS (%) 29.5 15.6 21.6 23.8 22.7 8.6 14.6 25.8 14.8 24.0 29.6 43.1 15.8 FY2013E RoCE (%) 13.8 15.8 28.3 17.0 17.7 7.4 41.0 17.6 23.3 23.9 11.7 26.8 20.2 ROE (%) 19.0 17.1 35.2 18.2 25.2 9.2 30.7 19.3 24.9 30.8 23.4 25.9 20.4

Source: Company, Angel Research; Note: * December year end.

August 10, 2011

Jul-11

Glaxo | 2QCY2011 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 Share in profit of Associates Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. 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 0 101 761 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 -

August 10, 2011

Glaxo | 2QCY2011 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 311 223 87 5 1,346 566 155 163 249 640 (73) 1,366 326 236 90 10 730 1,452 957 204 291 730 721 1,551 333 241 93 21 148 2,183 1,734 138 311 699 1,484 1,747 363 254 109 9 118 2,510 2,003 174 333 845 1,665 1,900 383 271 111 21 118 2,698 2,042 240 416 741 1,957 2,208 403 290 113 21 118 3,144 2,396 273 475 864 2,280 2,533 85 1,296 1,381 6 (20) 1,366 85 1,491 1,575 6 (30) 1,551 85 1,701 1,786 5 (45) 1,747 85 1,867 1,952 5 (57) 1,900 85 2,153 2,238 5 (35) 2,208 5 (35) 2,533 85 1 2,476 2,562 CY2007 CY2008 CY2009 CY2010 CY2011E CY2012E

August 10, 2011

Glaxo | 2QCY2011 Result Update

Cash flow statement

Y/E Dec. (` cr) Profit before tax 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 (0) 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) (0) 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

August 10, 2011

Glaxo | 2QCY2011 Result Update

Key ratios
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 32.5 31.4 13.0 1.7 11.1 34.6 13.0 30.4 29.6 11.4 1.9 10.1 28.6 11.0 35.4 34.3 10.1 1.4 8.5 24.1 9.3 32.1 31.1 9.2 1.9 7.4 21.1 8.4 29.5 39.1 8.0 1.6 6.5 18.3 7.2 24.4 23.8 7.0 2.0 5.6 15.7 6.2 CY2007 CY2008 CY2009 CY2010 CY2011E CY2012E

August 10, 2011

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Glaxo | 2QCY2011 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

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%)

August 10, 2011

11