Valuation hurdle remains a bitter pill for GSK Pharma

Most brokerages have neutral stance on stock

The stock of Glaxosmithkline Pharmaceuticals (GSK Pharma) is down 14 per cent since February, underperforming the BSE Healthcare index, which is up about 5.7 per cent during this period. From its highs in early February, the Indian unit of the pharma multinational has lost a fifth of its market capitalisation (mcap). While a weak December quarter performance and downgrades have led to muted returns, most brokerages have a neutral stance, given the valuation concerns.

Even as top pharmaceutical peers delivered double-digit growth in the December quarter, sales of GSK Pharma, at ~805 crore, were flat over the year-ago quarter. They were also less than the ~860 crore estimated by brokerages.

The flattish revenue was on account of price cuts in key brands and a slowdown in the acute segment. Prices of antibiotic Ceftum and ointment T-bact were cut by 57 per cent and 30 per cent, respectively, though some of this was offset by volume growth on a sequential basis.

The company said that, on an overall basis, the impact of the price cuts due to the National List of Essential Medicines (NLEM) was 8 per cent. However, its key brands such as Ceftum, T-bact and Calpol (analgesic/antipyretic) saw volume growth of 7 per cent which helped nullify the 8 per cent impact due to NLEM. The vaccines and vitamins/minerals/nutrients did well. Key vaccine brands like Infanrix Hexa (combination vaccine) were up by 12 per cent, while Havrix (Hepatitis A virus) and Boostrix (combination vaccine) grew 24 per cent and 40 per cent, respectively, during the March quarter. Launch of the shingles vaccine, Shingrix, found traction. Sales for the country’s top selling pharma brand Augmentin was flat; the company indicated that volumes for it are growing in double digits, led by line extensions.

The company expects strong volume growth for the NLEM brands in the first half of FY25. It has indicated that it will hike prices of its NON-NLEM portfolio by 60 per cent. The company is targeting double-digit sales growth in FY25.

On the margin front, a weaker product mix and higher raw material costs weighed on gross margins of the company which came in at 60.7 per cent. This was 340 basis points (bps) lower than the year-ago levels.

This percolated down to the operating profit margin levels as well and it saw a contraction of 140 bps year-on-year (Y-O-Y) to 27.1 per cent.

Performance at the operating level was better as lower gross margins were offset by lower employee and other expenses. Abdulkader Puranwala and Kashish Thakur of ICICI Securities believe that growth in the near term may be sluggish due to gradual uptick in sales of patented products. The acute heavy portfolio of general medicines has limited room for further price increase as nearly 40 per cent is under price control. However, the brokerage believes that cost savings from rationalisation of 12-14 per cent of field force will aid margins.

While ICICI Securities has raised FY25 earnings estimates by 2 per cent, factoring in better margins, it has downgraded the stock to ‘reduce’ with a revised target price of ~1,895. Though Motilal Oswal Research is positive on the efforts taken by the company to improve business prospects, it has reiterated its neutral rating due to valuations. The stock is trading at 46 times its FY25 earnings per share of ~43.