“BUY” This Large Cap Pharma Stock With A Target Price of Rs. 2038: HDFC Securities

Q2FY22 results of GlaxoSmithKline Pharmaceuticals Ltd

According to the brokerage the "Company delivered a strong performance in the quarter. As the acute market showed signs of recovery, the established brands grew in their respective therapeutic portfolios. Augmentin and Calpol regained their place amongst the top five brands in the Indian Pharmaceuticals Market (IPM). The promoted portfolio also gained market share, while products from innovation and specialty pipeline continued to make inroads to serve more patients. The company said that margin improvement was on the back of operational efficiencies, driven by sales growth and cost rationalisation. It has improved its cash position backed by working capital improvements. The company expects positive momentum to continue through the second half of the year which would lead to a strong performance in FY22."

HDFC Securities in its research report has said that "The top brands registered strong double-digit growth, led by a strong recovery in anti-infective therapy witnessed in the IPM. Revenue grew 15% YoY and 28% QoQ. Key brands growth in the quarter: Augmentin at 26%, Calpol - 88%, Betnovate - 14%, T-Bact - 24%, Neosporin - 19%, and Ceftum at 25%. Gross margin stood at 60.1%, up 190bps YoY but down 70bps QoQ. EBITDA margin came in at 27.4% vs. 19.2% in Q1FY22 and 23.3% in Q2FY21. This was on the back of operating leverage driven by higher revenue growth. The Cx transaction would impact EBITDA margin while the focused Rx (prescription) brands growth and new launches would keep the growth momentum higher than the cost increase. The Vx (Vaccine) segment is also expected to post higher growth, with Shingrix launch; however, the margin contribution would be lower, given the traded nature of the Vx portfolio."

According to the brokerage's research report "For H1FY22, revenue increased 18% at Rs 1800cr while operating margin witnessed 290bps expansion at 23.8%. Net profit stood at Rs 325cr. As of Sep-2021, GSK had cash & equivalents of Rs 1188cr. It has recently received a grant of the marketing authorization of the rotavirus vaccine from SEC of the Central Drugs Standard control organization. The rotavirus vaccine is a liquid frozen vaccine that stimulates the immune system to create antibodies without actually infecting the child. During FY21, Glaxo charged Rs 173cr as exceptional charges, largely comprising of an impairment charge to reflect the estimated realizable value of the assets, reversal of associated costs and of earlier provisions no longer required on account of the Zinetac recall."

Buy GlaxoSmithKline Pharmaceuticals Ltd with a target price of Rs. 2038

The brokerage has claimed that "GlaxoSmithKline (GSK) Pharma has strong parentage and product portfolio, healthy cash flows, robust return ratios and cash-rich B/S. The top-20 focus brands continue to be key growth drivers. Building new specialty brands (parent's pipeline) would enable room for consistent growth. The recent launch pipeline holds Shingrix, Trelegy, indication expansion for Nucala and Fluarix Tetra, followed by oncology pipeline. The management focus on improving cost efficiency should be earnings accretive in the long term. The divestment of two brands has come at a much better valuation post the Vemgal asset sale. Results for FY21 were impacted due to the voluntary global recall of ranitidine products including Zinetac in India and trigger-based impairment charges primarily towards the manufacturing facility at Vemgal, Bengaluru. GSK took a decision to discontinue the manufacture and supply of Zinetac tablets (150 mg and 300 mg products) in India."

According to the brokerage's research report "Board recommended Rs 30 per share dividend for FY21 and it was paid in Jul-2021. We estimate a 10% CAGR in revenue over FY21-24E. We have not considered the loss of revenue and cash inflow in our assumptions since timelines for the same are not yet announced. The company has registered a strong surge of 340bps in operating margin to 23.3% in H1FY22. We expect the margin to remain around 22-23% in the same period. Strong sales coupled with a steady margin would lead to 18% CAGR in adj. net profit over FY21-24E. At CMP, the stock trades at 41.5x/36.2x of FY23E/FY24E EPS. We feel investors can buy in the band of Rs 1731-1743 and add more on declines at Rs 1568 (35x Sep-23E EPS) for a base case target of Rs 1903 (42.5x Sep-23E EPS) and a bull case target of Rs 2038 (45.5x Sep-23E EPS) over the next two quarters."

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.