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GSK Pharma: A stable 2005! - Views on News from Equitymaster
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GSK Pharma: A stable 2005!
Feb 14, 2006

Performance Summary
GSK Pharma announced its results for the fourth quarter and year ending December 2005. For the year, the company reported a decent topline growth after having being plagued by VAT-related concerns in 1QCY05. While margins remained stable, the bottomline surged by 51% YoY on account of an extraordinary income. If one were to exclude this income, bottomline registered a 15% YoY growth.

Financial performance: A snapshot
(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
Net sales 2,825 3,234 14.5% 13,759 14,853 8.0%
Expenditure 2,172 2,572 18.4% 9,911 10,573 6.7%
Operating profit (EBDITA) 653 663 1.5% 3,848 4,280 11.2%
EBDITA margin (%) 23.1% 20.5%   28.0% 28.8%  
Other income 117 210 79.2% 509 656 29.0%
Depreciation 51 44 -14.2% 175 157 -10.0%
Profit before tax 719 828 15.2% 4,182 4,779 14.3%
Exceptional item (203) (89) -56.4% 670 1,958 192.1%
Tax 279 316 13.0% 1,522 1,716 12.8%
Profit after tax/(loss) 236 424 79.3% 3,331 5,021 50.7%
Net profit margin (%) 8.4% 13.1%   24.2% 33.8%  
No. of shares (m) 87.3 84.7   87.3 84.7  
Diluted earnings per share (Rs)*         59.3  
Price to earnings ratio (x)*         23.4  
(* on a trailing 12-month basis)            

What is the company’s business?
Glaxo is the largest pharma company in the Indian market with a share of 6.5% (December 2004). It is a 49% subsidiary of the US$ 33 bn Glaxo Group, the world's second-largest pharma company with an R&D war chest of US$ 4 bn. Glaxo's product portfolio boasts of some of the leading brands like Augmentin, Zinetac, Betnesol, Cobadex and Zevit in the domestic pharma market. The company underwent a restructuring exercise and effect of the same was evident in 2003 and 2004. It derives its revenues from pharmaceuticals, animal healthcare and fine chemicals. In 2004, it successfully merged Burroughs Wellcome India with itself.

What has driven performance in CY05?
Stable revenues barring VAT: Despite a poor performance in the first quarter on account of VAT-related concerns, the company staged a strong recovery in the second, third as well as the fourth quarters to post an 8% YoY topline growth during the year. This growth was attributed to the strong performance of the pharmaceutical division (up 9% YoY), which accounted for 85% of the company’s total revenues. The company’s strategy of focusing on its 30 power brands has also contributed to this growth. The other businesses include the fine chemicals and animal health businesses. These businesses contributed around 15% to the company’s topline and registered a decent 4% YoY growth.

Segmental snapshot
(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
Pharmaceuticals 2,278 2,717 19.3% 11,792 12,864 9.1%
PBIT margin (%) 23.6% 23.3%   31.3% 32.4%  
% of revenues 78.4% 80.9%   84.2% 84.8%  
Other businesses 627 640 2.1% 2,209 2,307 4.4%
PBIT margin (%) 25.6% 29.5%   21.3% 22.5%  
% of revenues 21.6% 19.1%   15.8% 15.2%  
Total revenues 2,905 3,357 15.6% 14,001 15,170 8.4%
PBIT margin (%) 24.1% 24.5%   29.7% 30.9%  

Maintaining margins: Margins remained stable at 28.8% during the year. As can be seen from the table below, despite a rise in raw material costs as a percentage of sales, the company has managed to wield control over staff costs and has reduced other expenditure. Going forward, the company intends to focus more on products that are outside the purview of the Drug Price Control Order (DPCO), as these products enjoy better margins.

Cost break-up
(% of sales) 4QCY04 4QCY05 CY04 CY05
Raw material consumption 41.2% 43.1% 42.9% 43.2%
Staff cost 10.9% 12.4% 10.5% 10.5%
Others 24.7% 24.0% 18.6% 17.5%

The extraordinary effect: Income received by Glaxo for the sale of its two properties at Mulund led to the 51% YoY rise in the bottomline during the year. It must be noted that in CY04 as well, Glaxo had received a one-time income for the sale of its Worli property. However, if one were to exclude the effect of these extraordinary incomes in both the years, the bottomline growth is at 15% YoY.

Over the last few quarters: Glaxo’s performance at the topline level has been consistent, with the exception of the blip in 1QCY05, wherein sales dipped on the back of VAT-related concerns. The company’s efficiencies at the operating level can be gauged by the fact that it has consistently maintained margins above 20%. What is commendable is the fact that margins were maintained even in the first quarter of the year, despite a drop in sales. However, going forward, we expect the scope for margin expansion to be limited, as most of the restructuring benefits have already been factored in.

Quarterly trend
(%) 3QCY04 4QCY04 1QCY05 2QCY05 3QCY05 4QCY05
Net sales growth 20.0% 23.5% -23.1% 29.1% 12.6% 14.5%
Operating profit margin 31.6% 23.1% 25.7% 33.8% 31.6% 20.5%
Net profit growth 201.2% 61.4% -26.7% 42.0% 79.3% 79.3%

What to expect?
At the current price of Rs 1,388, the stock is trading at a price to earnings multiple of 28.7 times our estimated CY07 earnings. The management has declared a dividend of Rs 14 per equity share and a special one-time dividend of Rs 14 per equity share due to surplus cash available. Glaxo has focused itself on its power brands and is likely to dominate these categories going forward. Glaxo will soon be entering growing market segments like cardiovascular, CNS and diabetes. It is exploring in-licensing opportunities in the gynaecology, gastroenterology and nutritional segments. The company is planning to increase activities on the clinical trials front, which shows that the Indian subsidiary is high on the parent’s radar. As far as product launches are concerned, Glaxo is planning to launch four products in the domestic markets in CY06.

We had recommended a ‘Hold’ on the stock in October 2005 with a target price of Rs 1,210, which has been breached. We will soon be updating our research report on the company.

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