We maintain ‘reduce’ on GlaxoSmithKline Pharmaceuticals (GSK Pharma) but lower our target price to R2,151 (earlier R2,305) as the recent the Q1 results were lower than our and consensus expectations. We value Glaxo at 27.5x one-year forward EPS (April 2016) of R78.2 to arrive at our target price. We believe the fair value trading range would be between 25-30x. The multiple accounts for risk to earnings from pricing regulation in India and a higher likelihood of inorganic moves as per management.
We introduce CY16f estimates. We estimate sales growth at 13-14% over the next three years, with a 569 bps expansion in ebitda margin over CY13-16f. A lack of visibility on inorganic moves, and intent for higher capex should limit P/E expansion, in our view. Consensus EPS estimates for CY14f have been cut ~30% over the past 12 months and further cuts following the quarterly results will adversely impact stock performance.
Glaxo’s Q1 results fell short of expectations. Sales of R600 crore were ~12% below our estimate of R680 crore and ~10% below the consensus estimate of R660 crore. Ebitda was R108 crore, ~28% below our estimate of R150 crore and ~30% below the consensus estimate of R154 crore. PAT came in at R96.5 crore, 24% below our estimate of R128 crore and ~30% below the consensus estimate of R137 crore. Revenue growth also disappoints.