Nomura revises Glaxo Smithkline target price to Rs 2,483

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Published: July 8, 2016 6:12:56 AM

Glaxo trades at 70.1x one-year forward PE and 10x current EV/sales. The valuations are undoubtedly rich and we believe the stock is factoring in a possible delisting if parent Glaxo Plc buys back the remaining shares

Glaxo trades at 70.1x one-year forward PE and 10x current EV/sales. The valuations are undoubtedly rich and we believe the stock is factoring in a possible delisting if parent Glaxo Plc buys back the remaining shares. It bought back shares to increase its stake to 75% in March 2014 at a valuation of 11.2x EV/sales.

The market expects a strong revival in EBITDA margins. These have declined to 17.3% in FY16 from the peak of 36% in 2009. We believe there are near-term headwinds, as ceiling prices of Glaxo’s largest selling drug, Augmentin, have been brought down by 35%. This will have an adverse impact on FY17F sales of 2%, on our estimates. Further, Glaxo’s strategy to raise volumes by reducing prices substantially in key products like Synflorix and Seretide is not margin-accretive. We therefore expect EBITDA margins to decline by 23 bps in FY17F. Our FY17F EPS estimates are reduced by 47%. The company has failed to acquire assets and grow inorganically, which for us is a disappointment. Over the medium term, we expect a revival in EBITDA margin to 22% in FY19F. The expansion in margin will be driven by improvement in volumes, new introductions, increased internal production and a tight leash on costs. We use 6.5x EV/sales (in line with the long-term trading average) on Jun 2017F sales of Rs  31.2 billion to arrive at our new target price of Rs 2,483.

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