3QCY2012 Result Update | Pharmaceutical

November 9, 2012

GlaxoSmithKline Pharma
Performance Highlights
Y/E Dec. (` cr) Net Sales Other income Gross profit Operating profit Adj. PAT 3QCY2012 669 42 384 188 164 2QCY2012 652 39 381 203 170 % chg (qoq) 2.5 7.4 0.7 (7.1) (3.7) 3QCY2011 608 44 366 176 146 % chg (yoy) 10.0 (5.3) 5.0 7.2 12.0

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 16,912 (2,038) 0.2 2,338/1,830 6,684 10 18,684 5,686 GLAX.BO GLXO@IN

`1,997 -

Source: Company, Angel Research

GlaxoSmithKline Pharma (Glaxo) reported its 3QCY2012 results, just-in-line with estimates both on the top-line and bottom-line front. The OPM at 28.2% came lower than our expectations of ~31.1%. Overall, the company posted net sales and adjusted net profit of `669cr and `164cr, respectively.We continue to maintain our Neutral view on the stock. Results just- in-line with expectations: For 3QCY2012, Glaxo reported a 10.0% yoy growth in its net sales to `669cr, just in line with our estimate of `688cr. The companys gross margin came in at 57.4%, lower than our estimate of 60.5%. This aided the OPM to come in at 28.2%, which was lower than our estimate of 31.1%, for 3QCY2012. During the quarter, Glaxo reported a growth of 12.0% yoy in its adjusted net profit to `164cr, just-in-line with our expectation of `167cr. Outlook and valuation: We expect Glaxos net sales to post a 12.2% CAGR to `2,993cr and EPS to register an 8.7% CAGR to `82.4 over CY201113E. At current levels, the stock is trading 26.3x and 24.2x CY2012E and CY2013E earnings, respectively. We remain Neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 50.7 14.8 20.4 14.1

Abs. (%) Sensex Glaxo

3m 6.4 (5.2)

1yr 7.6 (0.5)

3yr 13.2 27.1

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

CY2010 2,151 12.8 581 14.3 68.6 35.3 29.1 31.1 40.6 8.7 6.9 19.7

CY2011 2,378 10.6 591 1.7 69.8 31.2 28.6 30.4 38.2 8.7 6.3 20.0

CY2012E 2,651 11.4 644 9.0 76.0 31.7 26.3 30.8 40.5 7.5 5.5 17.3

CY2013E 2,993 12.9 698 8.4 82.4 31.2 24.2 29.0 38.9 6.6 4.7 15.2

Sarabjit Kour Nangra

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

Please refer to important disclosures at the end of this report

Glaxo | 3QCY2012 Result Update

Exhibit 1: 3QCY2012 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 Reported PAT Adj. Net profit EPS (`)
Source: Company, Angel Research

3QCY2012 669 42 710 384 57.4 188 28.2 0 5 225 (11) 225 73 152 164 19.3

2QCY2012 652 39 691 381 58.5 203 31.1 0 4 237 (6) 237 74 164 170 20.0

% chg (qoq) 2.5 7.4 2.8 0.7 (7.1) 12.6 (5.1) (5.1) (1.1) (6.9) (3.7)

3QCY2011 608 44 652 366 60.2 176 28.9 0 5 215 (0) 215 69 146 146 17.2

% chg (yoy) 10.0 (5.3) 9.0 5.0 7.2 0.0 4.8 4.9 5.5 4.4 12.0

9MCY2012 1,943 90 2,033 1,126 57.9 565 29.1 0 13 642 (80) 642 203 439 520 61.4

9MCY2011 % chg 1,772 (133) 1,639 1,096 61.8 545 30.7 0 14 397 (190) 397 103 294 484 57.1 61.6 96.7 49.3 7.4 (7.0) 61.6 3.7 9.7 24.1

Exhibit 2: 3QCY2012 Actual vs Angel estimates

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

Actual 669 42 188 73 164

Estimates 688 39 214 81 167

Variation (%) (2.8) 7.4 (11.8) (9.3) (2.2)

Revenue grew by 10.0%, just in line with estimates

For 3QCY2012, Glaxo reported a 10.0% yoy growth in its net sales to `669cr, just in line with our estimate. The top-line growth came on the back of an 11% yoy growth in the core pharmaceuticals business. During the quarter, the company launched Zimivir for herpes treatment. The company expanded its CNS portfolio by launching Ictacetam used in the treatment of epilepsy.

November 9, 2012

Glaxo | 3QCY2012 Result Update

Exhibit 3: Sales trend

700 652 608 600 566 623 669 40.0 35.0 30.0 25.0 15.0 500 10.0 5.0 0.0 400 3QCY2011 4QCY2011
Sales

(` cr)

(5.0) 1QCY2012 2QCY2012

Growth (YoY)

3QCY2012

Source: Company, Angel Research

OPM comes in at 28.2%

The companys gross margin came in at 57.4%, lower than our expectation of 60.0%. This led to an OPM of 28.2%, which was lower than our estimate of 31.1%, for 3QCY2012. However on a yoy basis, the OPM was almost flat (28.9% in 3QCY2011).

Exhibit 4: OPM trend

35.0

31.1

31.4

31.1

(%)

30.0

28.9 28.2

25.0 3QCY2011 4QCY2011 1QCY2012 2QCY2012 3QCY2012

Source: Company, Angel Research

Net profit just-in-line with estimates

During the quarter, Glaxo reported a growth of 12.0% yoy in its adjusted net profit to `164cr, justinline with our expectation of `167cr. This was mainly on the back of a lower-than-expected OPM during the quarter.

November 9, 2012

(%)

20.0

Glaxo | 3QCY2012 Result Update

Exhibit 5: Adjusted net profit trend

250 200 150 146 147 187 170 164

(` cr)

100 50 0 3QCY2011 4QCY2011 1QCY2012 2QCY2012 3QCY2012

Source: Company, Angel Research

November 9, 2012

Glaxo | 3QCY2012 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. New product launches since CY2007 has been a key growth driver for the company and it accounted for 27% yoy top-line growth registered by the company in CY2011. With this the new product contribution to sales has come to around 9% in CY2011. Further, in-line with market dynamics, Glaxo has launched patented products at discounts in India compared to other markets. Thus, in CY2012, we expect the company to launch 46 branded generic products. Overall, for CY2011-13E we expect the domestic formulation business of the company to grow at a CAGR of 12%.

Outlook and valuation:

Glaxo has a strong balance sheet with cash of ~`2,000cr, which could be used for future acquisitions or higher dividend payouts. We expect Glaxos net sales to post a 12.2% CAGR to `2,993cr and EPS to register an 8.7% CAGR to `82.7 over CY201113E. At current levels, the stock is trading 26.3x and 24.2x CY2012E and CY2013E earnings, respectively. We remain Neutral on the stock.

Exhibit 6: Key assumptions

CY2012E Sales growth (%) Growth in employee expenses (%) Operating margin (%) Capex (` cr)
Source: Company, Angel Research

CY2013E 12.9 15.0 31.2 21.0

11.4 15.0 31.7 17.0

Exhibit 7: One-year forward PE

3,000 2,500 2,000

(`)

1,500 1,000 500 -

Oct-08

Oct-10

May-07

Nov-07

May-09

May-11

Dec-09

Aug-07

Aug-09

Aug-11

Dec-11

Mar-08

Mar-10

Price

15x

20x

25x

30x

Source: Company, Angel Research

November 9, 2012

Mar-12

Oct-12

Jun-08

Jan-09

Jan-11

Jul-10

Jul-12

Glaxo | 3QCY2012 Result Update

Exhibit 8: Recommendation summary

Company Alembic Pharma. Aurobindo Pharma. Sanofi India* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Neutral Neutral Accumulate Accumulate Neutral Buy Neutral Buy Accumulate Accumulate Neutral Neutral Neutral CMP (`) 69 170 2,193 846 394 1,768 109 1,997 66 427 583 107 542 695 Tgt. price Upside (`) 91 926 419 145 89 485 652 % PE (x) 32.6 9.5 6.5 33.5 33.9 13.7 11.8 7.4 13.5 21.0 19.6 18.8 19.0 9.6 24.2 7.5 11.4 18.8 8.0 16.9 23.7 FY2014E EV/Sales (x) 0.8 1.3 2.7 2.6 3.2 2.8 1.1 4.7 0.9 1.8 2.6 0.8 1.9 4.6 EV/EBITDA (x) 4.9 9.2 17.6 13.3 13.5 13.4 6.3 15.2 6.0 8.7 13.2 5.6 11.8 10.7 FY11-14E CAGR in EPS (%) 14.8 61.1 12.0 18.7 21.2 2.3 26.6 8.7 32.8 30.6 26.5 (1.2) 44.8 0.1 FY2014E RoCE (%) RoE (%) 29.4 10.4 16.1 19.3 18.4 15.1 10.6 38.9 15.5 26.1 22.5 4.8 15.8 26.7 30.0 16.4 17.0 26.6 17.2 20.8 11.0 29.0 17.0 26.0 24.7 7.3 28.9 18.8

Source: Company, Angel Research; Note: * December year ending;

Background
GlaxoSmithKline Pharmaceuticals (Glaxo) is the third largest pharmaceutical player in the Indian market with a market share of 5%. The companys product portfolio includes both, prescription medicines and vaccines. Glaxo sells prescription medicines across therapeutic areas such as anti-infectives, dermatology, gynaecology, diabetes, oncology, cardiovascular diseases and respiratory diseases. A large portion of the companys revenue comes from the acute therapeutic portfolio. However, the company is now scouting for opportunities in high-growth therapeutic areas such as CVS, CNS, diabetes and oncology. Further, with a strong parentage, Glaxo plans to increase its product portfolio through patented launches and vaccines.

November 9, 2012

Glaxo | 3QCY2012 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 (% of PBT) 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 701 10.8 (128) 829 238 28.7 591 591 365 7.4 21.6 43 43 (33.9) 761 8.6 (7) 769 261 33.9 508 508 503 37.8 26.4 59 59 37.8 872 14.5 18 854 293 34.4 561 561 581 15.4 27.0 69 69 15.4 905 3.9 301 605 176 29.1 429 429 591 1.7 24.8 70 70 1.7 644 644 9.0 24.3 76 76 9.0 698 698 8.4 23.3 82 82 8.4 950 4.9 950 306 32.2 644 1,042 9.6 1,042 344 33.0 698 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E 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 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 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 2,433 55 2,378 1 2,379 10.3 1,635 919 122 279 314 743 (2.0) 31.2 20 723 (2.5) 30.4 0 182 2,703 52 2,651 5 2,655 11.6 1,811 1,066 94 321 330 840 13.0 31.7 17 823 13.9 31.0 122 3,054 61 2,993 5 2,998 12.9 2,061 1,212 105 370 374 932 11.0 31.2 18 915 11.1 30.6 122

November 9, 2012

Glaxo | 3QCY2012 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 730 1,452 957 204 291 730 721 1,551 148 2,183 1,734 138 311 699 1,484 1,747 118 2,510 2,003 174 333 845 1,665 1,900 112 2,761 2,043 300 419 1,119 1,642 1,879 112 3,193 2,398 265 530 1,246 1,947 2,184 112 3,681 2,783 299 599 1,407 2,275 2,514 326 236 90 10 333 241 93 21 363 254 109 9 316 217 99 25 337 233 103 21 358 251 106 21 6 (30) 1,551 5 (45) 1,747 5 (57) 1,900 5 (62) 1,879 5 (62) 2,184 5 (62) 2,514 85 1,491 1,575 85 1,701 1,786 85 1,867 1,952 85 1,851 1,936 85 2,156 2,241 85 2,486 2,571 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

November 9, 2012

Glaxo | 3QCY2012 Result Update

Cash flow statement

Y/E Dec. (` cr) Profit before tax and exceptionals Depreciation (Inc)/Dec in working capital Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in fixed assets (Inc.)/Dec. in investments 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 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E 829 16 7 246 606 (20) (617) (637) 0 (355) 1,187 832 802 155 957 769 16 15 185 614 (18) (581) (599) 0 (394) 1,156 762 777 957 1,734 854 18 88 314 646 (17) (31) (47) 0.26 (296) (34) (330) 269 1,734 2,003 605 20 63 188 499 30 (6) 24 (0) (444) (39) (484) 40 2,003 2,043 950 17 50 306 710 (17) (17) (339) (339) 355 2,043 2,398 1,042 18 58 344 774 (21) (21) (367) (367) 386 2,398 2,783

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Glaxo | 3QCY2012 Result Update

Key ratio
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) Angel ROIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) (0.6) (1.6) (1.0) (2.6) (1.0) (2.6) (1.1) (2.7) (1.1) (2.8) (1.1) (3.0) 5.3 48 10 80 98 5.8 47 11 81 90 6.2 46 9 82 81 7.0 46 11 72 94 8.1 45 14 70 104 8.6 54 17 82 103 39.7 24.7 39.9 29.9 40.6 31.1 38.2 30.4 40.5 30.8 38.9 29.0 43.1 43.1 71.7 40.0 186.0 59.4 59.4 61.9 30.0 210.9 68.6 68.6 68.3 40.0 230.4 69.8 69.8 53.0 45.0 228.5 76.0 76.0 78.0 30.4 264.5 82.4 82.4 84.5 33.0 303.5 46.3 27.8 10.7 2.0 9.4 26.8 10.3 33.6 32.3 9.5 1.5 8.0 22.5 8.7 29.1 29.2 8.7 2.0 6.9 19.7 7.8 28.6 37.7 8.7 2.3 6.3 20.0 7.9 26.3 25.6 7.5 1.5 5.5 17.3 6.6 24.2 23.6 6.6 1.7 4.7 15.2 5.6 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

November 9, 2012

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Glaxo | 3QCY2012 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%)

November 9, 2012

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