4QCY2012 Result Update | Pharmaceutical

February 20, 2013

GlaxoSmithKline Pharma
Performance Highlights
Y/E Dec. (` cr) Net Sales Other income Gross profit Operating profit Adj. PAT 4QCY2012 657 61 377 178 159 3QCY2012 669 48 384 182 164 % chg (qoq) (1.7) 26.9 (1.9) (2.1) (3.0) 4QCY2011 566 65 334 159 147 % chg (yoy) 16.1 (6.8) 12.8 12.4 7.6

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 17,994 (2,063) 0.2 2,338/1,916 6,460 10 19,643 5,943 GLAX.BO GLXO@IN

`2,124

Source: Company, Angel Research

GlaxoSmithKline Pharma (Glaxo) reported its 4QCY2012 results, just-in-line with estimates on the top-line and OPM fronts, which came in at `657cr and 27.2% respectively. The net profit came in at `159cr, higher than an expected `132cr, registering a growth of 7.6% yoy. We continue to maintain our Neutral view on the stock. Just in-line results on sales and OPM front: For 4QCY2012, Glaxo reported a 16.1% yoy growth in its net sales to `657cr, more or less in line with our estimate of `680cr. The companys gross margin came in at 57.3%, ie in line with our estimate of 57.4%. This aided the OPM to come in at 27.2% (in line with our estimate of 26.8%) for 4QCY2012. During the quarter, Glaxo reported a growth of 7.6% yoy in its adjusted net profit to `159cr, higher than our expectation of `132cr. Outlook and valuation: We expect Glaxos net sales to post a 13.0% CAGR to `3,319cr and EPS to register a 4.1% CAGR to `86.7 over CY201214. At current levels, the stock is trading 27.2x and 24.5x CY2013E and CY2014E earnings, respectively. We remain Neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 50.7 13.3 21.8 14.2

Abs. (%) Sensex Glaxo

3m 7.2 6.5

1yr 6.5 2.2

3yr 21.3 28.7

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

CY2011

CY2012

CY2013E

CY2014E

2,378 10.6 591 1.7 69.8 31.2 30.5 30.4 36.1 9.3 6.7 21.5

2,600 9.3 678 14.8 80.1 28.7 26.5 34.4 34.0 9.0 6.1 21.4

2,937 13.0 662 (2.5) 78.1 30.4 27.2 31.6 38.9 8.3 5.3 17.4

3,319 13.0 734 11.0 86.7 30.2 24.5 31.9 39.9 7.4 4.6 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 | 4QCY2012 Result Update

Exhibit 1: 4QCY2012 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

4QCY2012 657 61 718 377 57.3 178 27.2 0 5 235 (20) 215 76 139 159 18.7

3QCY2012 669 48 710 384 57.4 182 27.3 0 5 225 (11) 214 73 152 164 19.3

% chg (qoq) (1.7) 26.9 1.0 (1.9) (2.1) (5.4) 4.1 0.3 4.2 (9.1) (3.0)

4QCY2011 566 65 631 334 59.0 159 28.0 0 6 218 (11) 207 70 137 147 17.4

% chg (yoy) 16.1 (6.8) 13.7 12.8 12.4 (25.5) 7.8 3.8 8.3 1.3 7.6

CY2012 2,600 269 2,869 1,503 57.8 744 28.6 0 18 996 (101) 895 318 577 678 80.1

CY2011 2,338 238 2,576 1,430 61.1 704 30.1 0 20 922 (201) 721 290 431 656 77.4

% chg 11.2 11.4

5.7 (12.6) 8.0 24.0 9.4 34.1 3.4

Exhibit 2: 4QCY2012 Actual vs Angel estimates

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

Actual 657 61 178 76 159

Estimates 680 22 182 65 132

Variation (%) (3.4) 176.2 (2.2) 16.7 19.8

Revenue grew by 16.1%, just in line with estimates

For 4QCY2012, Glaxo reported a 16.1% yoy growth in its net sales to `657cr, more or less in line with our estimate of `680cr. The top-line growth came on the back of a 15.9% yoy growth in the core pharmaceuticals business. In 2012, the company added new products across therapeutic areas. It launched Altargo in the dermatology portfolio; Volibris (Ambrisentan), a non-sulphonamide class endothelin receptor antagonist (ERA) to treat pulmonary arterial hypertension (PAH); HycamtinTM to fulfill unmet needs for patients with advance cancers and relapsed small cell lung cancer (SCLC); Seretide Evohaler - a metered dose inhaler (MDI) with dose counter to help patients keep a correct count of drug doses taken.

February 20, 2013

Glaxo | 4QCY2012 Result Update

Exhibit 3: Sales trend

700 652 650 600 566 623 669 657 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 (5.0) 4QCY2011 1QCY2012 2QCY2012 3QCY2012 4QCY2012 Sales
Source: Company, Angel Research

(` cr)

550 500 450 400 Growth (YoY)

(%)

OPM comes in at 27.2%

The companys gross margin came in at 57.3%, just in line with our estimate of 57.4%. This aided the OPM to come in at 27.2%, which is in line with our estimate of 26.8%, for 4QCY2012. On a yoy basis , the company posted an 87bp expansion in the OPM.

Exhibit 4: OPM trend

35.0

31.4

31.1

(%)

30.0 28.0 27.3 27.2 25.0 4QCY2011 1QCY2012 2QCY2012 3QCY2012 4QCY2012

Source: Company, Angel Research

Net profit better than estimated

During the quarter, Glaxo reported a growth of 7.6% yoy in its adjusted net profit to `159cr, better than our expectation of `132cr. This was on back of higher-thanexpected other income.

February 20, 2013

Glaxo | 4QCY2012 Result Update

Exhibit 5: Adjusted net profit trend

250 200 150 100 50 0 4QCY2011 1QCY2012 2QCY2012 3QCY2012 4QCY2012 147 187 170 164 159

Source: Company, Angel Research

February 20, 2013

(` cr)

Glaxo | 4QCY2012 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 launch of five patented products (mainly Tykerb and Rotarix) in the last two years. New product launches since CY2007 have been driving the companys growth; they 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. Overall, for CY2012-14 we expect the domestic formulation business of the company to grow at a CAGR of 13%.

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 13.0% CAGR to `3,319cr and EPS to register a 4.1% CAGR to `86.7 over CY201214. At current levels, the stock is trading 27.2x and 24.5x CY2013E and CY2014E earnings, respectively. We remain Neutral on the stock.

Exhibit 6: Key assumptions

CY2013E Sales growth (%) Growth in employee expenses (%) Operating margin (%) Capex (` cr)
Source: Company, Angel Research

CY2014E 13.0 15.0 30.2 22.0

13.0 15.8 30.4 21.0

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

Oct-12

Jun-08

Jan-09

Jan-11

Dec-09

Aug-07

Aug-09

Aug-11

Dec-11

Mar-08

Mar-10

Price

15x

20x

25x

30x

Source: Company, Angel Research

February 20, 2013

Mar-12

Jan-13

Jul-10

Jul-12

Glaxo | 4QCY2012 Result Update

Exhibit 8: Recommendation summary

Company Alembic Pharma. Aurobindo Pharma Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma Reco Buy Accumulate Accumulate Accumulate Neutral Buy Neutral Buy Buy Accumulate Neutral Neutral Neutral CMP (`) 77 185 773 382 1,827 84 2,124 64 466 587 409 2,295 786 Tgt. price Upside (`) 95 208 817 419 155 78 559 655 % PE (x) 25.0 12.4 8.8 9.6 84.5 27.9 19.9 11.5 8.1 13.4 19.6 17.7 19.7 5.4 27.2 8.1 12.7 18.9 13.1 26.1 26.7 FY2014E EV/Sales (x) 0.9 1.3 2.4 3.1 2.9 1.0 5.3 1.0 1.9 2.7 1.4 2.9 5.4 EV/EBITDA (x) 5.2 9.0 13.3 12.6 13.8 5.2 17.4 6.2 9.1 12.4 9.1 17.3 12.7 FY11-14E 17.1 69.7 11.5 23.2 2.3 48.2 5.8 24.8 30.6 27.2 50.3 2.7 0.1 FY2014E 29.4 10.7 17.2 19.1 15.1 10.4 38.9 14.6 25.7 24.9 29.7 12.5 27.6 30.2 17.8 24.8 17.6 20.8 11.6 31.6 15.6 26.4 25.2 16.1 14.8 19.2 CAGR in EPS (%) RoCE (%) RoE (%)

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.

February 20, 2013

Glaxo | 4QCY2012 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 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 1.7 577 678 14.8 26.1 80 80 14.8 662 662 (2.5) 22.5 78 78 (2.5) 734 734 11.0 22.1 87 87 11.0 996 10.0 101 895 318 35.5 577 1,002 0.6 1,002 341 34.0 662 1.0 1,113 11.0 1,113 378 34.0 734 CY09 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 CY10 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 CY11 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 CY12 2,652 52 2,600 29 2,629 10.5 1,855 1,097 94 296 369 745 0.2 28.7 18 727 0.6 28.0 240 CY13E 2,997 60 2,937 5 2,942 11.9 2,043 1,190 103 340 411 894 20.0 30.4 18 875 20.4 29.8 122 CY14E 3,387 68 3,319 6 3,325 13.0 2,316 1,344 116 391 465 1,003 12.2 30.2 19 984 12.4 29.6 123

February 20, 2013

Glaxo | 4QCY2012 Result Update

Balance Sheet
Y/E Dec. (` cr) SOURCES OF FUNDS Equity share capital Preference Capital Reserves& surplus Shareholders funds Minority Interest Total loans Other long-term liabilities Long-term provisions Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net block Capital work-in-progress Goodwill Other non-current assets Long-term loans and adv. Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Mis. Exp. not written off Total Assets 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 1,900 307 217 90 25 36 157 112 2,548 2,014 85 448 860 1,688 2,109 345 233 112 21 17 195 55 2,602 2,067 260 520 836 1,765 2,165 366 251 115 21 17 194 55 3,318 2,437 294 587 1,380 1,938 2,340 387 271 116 22 17 219 55 3,718 2,722 332 664 1,560 2,158 2,587 85 1,701 1,786 5 (45) 1,747 85 1,867 1,952 5 (57) 1,900 85 1,851 1,936 5 5 225 (62) 2,109 85 1,922 2,007 4 5 236 (87) 2,165 85 2,096 2,180 5 5 236 (87) 2,340 85 2,342 2,427 6 5 236 (87) 2,587 CY09 CY10 CY11 CY12 CY13E CY14E

February 20, 2013

Glaxo | 4QCY2012 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 CY09 769 16 15 185 614 (18) (581) (599) 0 (394) 1,156 762 777 957 1,734 CY10 854 18 88 314 646 (17) (31) (47) 0.26 (296) (34) (330) 269 1,734 2,003 CY11 605 20 (205) 188 232 39 (6) 33 (1) (444) 191 (254) 11 2,003 2,014 CY12 895 18 (270) 318 325 (34) (57) (91) (488) 306 (182) 52 2,014 2,067 CY13E 1,002 18 443 341 1,123 (21) (21) (488) (244) (732) 370 2,067 2,437 CY14E 1,113 19 65 378 819 (22) (22) (488) (24) (512) 285 2,437 2,722

February 20, 2013

Glaxo | 4QCY2012 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 35.8 34.3 10.1 1.4 8.5 24.1 9.3 31.0 31.1 9.2 1.9 7.4 21.1 8.4 30.5 40.1 9.3 2.1 6.7 21.5 7.6 26.5 30.2 9.0 2.4 6.1 21.4 7.4 27.2 26.5 8.3 2.4 5.3 17.4 6.7 24.5 23.9 7.4 2.4 4.6 15.2 5.9 CY09 CY10 CY11 CY12 CY13E CY14E

February 20, 2013

10

Glaxo | 4QCY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

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%)

February 20, 2013

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