GSK Pharma -Benefit of product mix offset by lower operating leverage

Revival in revenue growth delayed by COVID-19-led crisis
 GSK Pharma (GLXO) reported an all-time high gross margin (GM) of 64%. The
company has been curtailing low-margin products and focusing on key
brands for the past four quarters. The benefit of these actions is now finally
reflecting on the margin. GLXO remains focused on the Anti-Infectives,
Dermatology, and Anti-Pyretic therapy areas through enhanced MR
productivity and better engagement with healthcare professionals.
 However, we reduce our EPS estimate by 2.4%/1% for FY21/FY22 to factor
COVID-19-led weakness in Anti-Infectives and other acute therapies. We
continue to value GLXO at 37x 12M forward earnings to arrive at a price
target of INR1,300 (from INR1,320 earlier). Maintain Neutral .
Superior margins, led by better-than-expected earnings
 Sales grew ~3% YoY to INR7.8b (our est.: INR8.0b), led by better traction in
the Anti-Infectives, Dermatology, and Anti-Pyretic therapy areas.
 GM improved sharply by ~460bp YoY and ~610bp QoQ to 64%, supported by
a change in the product mix.
 The EBITDA margin improved by a mere ~70bp YoY to 22.4%, weighed by
lower operating leverage (employee cost / other expenses up 260bp YoY /
130bp YoY as a percentage of sales), which offset the benefit of a better GM.
 EBITDA increased ~6.4% YoY to INR1.7b (our est.: INR1.4b). Adj. PAT was flat
at INR1.3b (our est.: INR1b).
 For FY20, sales stood at INR32.3b (+3% YoY), EBITDA at INR6.6b (9% YoY),
and Adj. PAT at INR4.8b (+15% YoY).
Key highlights
 Adjusting for tail-end brand rationalization, sales growth was healthy at 13%
for FY20. Furthermore, key brands saw 20% growth on a YoY basis.
 GLXO is exploring options, including the potential sale of the Vemgal site.
 Most of GLXO’s top 10 products grew at a healthy rate during the quarter.
Its largest product (Augmentin) grew ~20% YoY and its third largest product
(Calpol) ~25% YoY.
 Of GLXO’s top three therapies (contributing ~55% to overall sales),
Pain/Analgesics posted the highest growth with 22.3%, followed by AntiInfectives (+15% YoY) and Hormones (+10% YoY).
 The Menveo vaccine (launched in Dec’19) for meningococcal disease is
showing robust traction, with 30% unit share.
Valuation and view
 With the focus on key brands, meaningful (290bp) improvement has been
witnessed in the EBITDA margin over FY18–20. The benefit of a superior
margin profile is expected to be counter-balanced by muted revenue growth
(led by slowdown due to COVID-19) and reduced operating leverage. The
earnings CAGR of 22% over FY20–22 may look aggressive on account of a
significant reduction in the tax rate.
 We reduce our EPS estimate by 2.4%/1% for FY21/FY22 to factor COVID-19-
led challenges. Accordingly, we reduce our price target to INR1,300 (from
INR1,320 earlier) at 37X 12M forward earnings. We maintain Neutral as the
valuation adequately factors the upside.