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GSK Pharma: Strong finish to the year - Views on News from Equitymaster

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GSK Pharma: Strong finish to the year
Feb 16, 2010

Performance summary
  • Revenues grow by 12.5% YoY during CY09 led by the company’s priority products.
  • EBDITA margins remain stable at 35.7% during the year.
  • Bottomline grows by 13% YoY (excluding extraordinary items) in tandem with the growth in sales.
  • Board declares a dividend of Rs 30 per equity share (dividend yield of 2%).


Financial performance: A snapshot
(Rs m) 4QCY08 4QCY09 Change CY08 CY09 Change
Net sales 3,752 4,499 19.9% 16,811 18,911 12.5%
Expenditure 2,637 3,060 16.1% 10,827 12,162 12.3%
Operating profit (EBDITA) 1,116 1,438 28.9% 5,983 6,749 12.8%
EBDITA margin (%) 29.7% 32.0%   35.6% 35.7%  
Other income 301 195 -35.2% 979 999 2.0%
Depreciation 47 48 0.4% 163 164 0.2%
Profit before tax 1,369 1,586 15.8% 6,799 7,585 11.6%
Tax 477 518 8.6% 2,315 2,536 9.5%
Exceptional item 1,193 (31)   1,282 74 -94.2%
Profit after tax/(loss) 2,085 1,036 -50.3% 5,766 5,123 -11.1%
Net profit margin (%) 55.6% 23.0%   34.3% 27.1%  
No. of shares (m)       84.7 84.7  
Diluted earnings per share (Rs)         60.5  
Price to earnings ratio (x)*         25.9  
* on a trailing 12-month basis

What has driven performance in CY09?
  • GSK Pharma’s topline during the year grew by 12.5% YoY. This could be attributed to the active promotion of priority products including vaccines (accounting for one third of revenues), which registered a double-digit growth. New product launches made could also have played a role in contributing to revenue growth. In 4QCY09, sales grew by a robust 20% YoY.

  • Operating margins remained stable at 35.7% during the year. A fall in raw material costs (as percentage of sales) was offset by a rise in staff costs and other expenditure. For the fourth quarter, however, operating margins improved by 2.3%. The company’s operating margins are the best when compared to its MNC peers and we expect them to improve going forward. This will largely be led by changes in its product mix as opposed to any cost reduction.

  • The bottomline declined by 11% YoY during the year. However, this was largely due to the extraordinary income that the company received in CY08. Thus, on excluding the same, net profits grew by 13% YoY in tandem with the growth in sales.

What to expect?
At the current price of Rs 1,566, the stock is trading at a multiple of 22.8 times our estimated CY11 earnings. Going forward, GSK Pharma intends to continue its focus on priority products, which account for a third of its revenues and increase the contribution from the chronic therapy segment through in-licensing opportunities and brand acquisitions. Continued emphasis will be placed on improving the product mix and focusing on higher margin products. GSK Pharma is also planning to increase activities on the clinical trials front, which shows that the Indian subsidiary is high on the parent’s radar. The company has done better than our estimates on the topline front and we shall have to upgrade our numbers accordingly. Having said that, current valuations do not leave much on the table for investors.

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