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GSK Pharma: Steadfast during the year - Views on News from Equitymaster

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GSK Pharma: Steadfast during the year
Feb 18, 2009

Performance summary
  • Revenues grow by 7% YoY during the year. Excluding the fine chemicals business, which was present during CY07, revenues grow by 10% YoY.
  • EBDITA margins increase by 1.8% led by an increased emphasis on improving the product mix.
  • Bottomline registers growth of 11% YoY during the year. However, if one excludes the extraordinary income during CY07 and CY08, net profits grow at a faster pace of 19% YoY led by higher other income.


Financial performance: A snapshot
(Rs m) 4QCY07 4QCY08 Change CY07 CY08 Change
Net sales 3,468 3,749 8.1% 15,771 16,807 6.6%
Expenditure 2,413 2,637 9.3% 10,441 10,827 3.7%
Operating profit (EBDITA) 1,055 1,112 5.4% 5,331 5,980 12.2%
EBDITA margin (%) 30.4% 29.7%   33.8% 35.6% 5.3%
Other income 212 304 43.6% 708 983 38.8%
Depreciation 50 47 -5.8% 162 163 1.1%
Profit before tax 1,216 1,369 12.5% 5,877 6,799 15.7%
Tax 417 477 14.5% 2,100 2,315 10.3%
Exceptional item 10 -   1,409 1,282  
Profit after tax/(loss) 809 892 10.2% 5,186 5,766 11.2%
Net profit margin (%) 23.3% 23.8%   32.9% 34.3%  
No. of shares (m)       84.7 84.7  
Diluted earnings per share (Rs)**         52.9  
Price to earnings ratio (x)*         22.6  
(* on a trailing 12-month basis)
(** excluding extraordinary items)

What has driven performance in CY08?
  • While GSK Pharma’s topline during the year grew by 7% YoY, excluding the fine chemicals business which was present in CY07 and not present this year, sales on a like-to-like basis stood at 10% YoY. Active promotion of priority products including vaccines (accounting for one third of revenues), which registered a double-digit growth contributed to the growth in the pharmaceutical business.

  • Operating margins improved by 1.8% in CY08 owing to an improvement in the product mix (the company has been concentrating on increasing its focus on priority products as these are not under price control), higher volumes and decline in raw material costs and other expenses (as percentage of sales). Going forward, we expect operating margins to improve and this will largely be led by changes in its product mix as opposed to any cost reduction.

  • The bottomline registered a growth of 11% YoY during CY08. However, if one excludes the extraordinary income during both CY07 and CY08, net profits grew by a robust 19% YoY led by higher other income.

What to expect?
At the current price of Rs 1,197, the stock is trading at a multiple of 19.2 times our estimated CY10 earnings. Going forward, GSK Pharma intends to continue its focus on its 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. While the company launched ‘Carzec’ and ‘Arixtra’ in CY07 and the anti-cancer drug ‘Tykerb’ in CY08, it has envisaged launching 3 more new drugs and 3 vaccines in the domestic market in CY09 and CY10. 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. Excluding the extraordinary income in CY08, the company’s performance has been in line with our estimates. We shall soon update our research report on the company.

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