GlaxoSmithKline Pharma (Glaxo) offers defensive growth through its strong brand franchise and well established market presence (sales force of 1,850).
As the growth momentum of the industry gains further pace through higher penetration in Tier 2 cities/rural areas; growing incomes of middle class; and to some extent through pricing – its brand equity and market presence will enable it to play a key role to capture this growth opportunity.
Glaxo’s ability to leverage its parent’s drug development abilities, strong brand franchise in the Indian pharma market, and marketing presence makes it the preferred bet to capture both penetration driven growth opportunity and patented drug opportunity.
We estimate a topline growth of 10.1% over FY09-10 and higher growth trajectory beyond 2011-12, due to the patented drug opportunity, which Glaxo is well positioned to leverage vis-à-vis the competition.
At the EBITDA level, we expect the company to maintain the current margins of ~35% (amongst the highest in the industry) in the medium term.
At Rs1,099 the stock is trading at a discount to its historic PE multiple, but at a premium to the industry.
Given the defensive nature of the stock, GLXO appears largely insulted from the current economic turmoil. Over a long term we expect GLXO to be a key beneficiary under the new IP regime (the clarity of which will emerge in next 2 years).
We have an Outperform rating on the stock and the target price of Rs.1200 implying an exit multiple of 18x over FY10E.