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GSK Pharma: Best margins among peers
Feb 28, 2008

Performance summary
  • Revenues grow by a subdued 2% YoY in CY07 owing to the sale of the fine chemicals business.
  • EBDITA margins improve by 1.8% led by an increased emphasis on improving the product mix.

  • Excluding the impact of the extraordinary income during both 3QCY06 and 3QCY07, net profits grow by 10% YoY.

  • Recommends a dividend of Rs 18 per share. Besides this, given the surplus cash after the sale of the fine chemicals business, the board recommends a special additional dividend of Rs 18 per share (total dividend yield is 3.6%).

Financial performance: A snapshot
(Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
Net sales 3,203 3,393 5.9% 15,529 15,771 1.6%
Expenditure 2,311 2,369 2.5% 10,511 10,396 -1.1%
Operating profit (EBDITA) 892 1,024 14.8% 5,019 5,375 7.1%
EBDITA margin (%) 27.8% 30.2%   32.3% 34.1%  
Other income 222 287 29.4% 699 898 28.5%
Depreciation 41 50 22.1% 159 162 2.0%
Profit before tax 1,072 1,261 17.6% 5,560 6,112 9.9%
Tax 391 432 10.6% 1,942 2,115 8.9%
Extraordinary item (4) (20)   1,838 1,379 -24.9%
Profit after tax/(loss) 678 809 19.3% 5,455 5,377 -1.4%
Net profit margin (%) 21.2% 23.8%   35.1% 34.1%  
Net profit margin (excl. extraordinary items) 21.3% 24.4%   23.3% 25.3%  
No. of shares (m) 84.7 84.7   84.7 84.7  
Diluted earnings per share (Rs)*         47.2  
Price to earnings ratio (x)         22.3  
(* on a trailing 12-month basis)

What has driven performance in CY07?
  • GSK Pharma’s topline during the year grew by a meager 2% YoY. The company had divested its fine chemicals business in 2QCY07 and excluding the animal health and fine chemicals businesses, the growth in sales of the core pharmaceuticals business stood at a much better 7.8%. Active promotion of priority products (accounting for one third of revenues), which registered a double-digit growth, and shift from the acute to the chronic disease segment has contributed to the growth in the pharmaceutical business. As far as new products are concerned, the company launched ‘Arixtra’ (Fondaparinux), a new generation anti-coagulant and the cardiovascular drug ‘Carzec’ (Carvedilol) during the year.

  • Operating margins expanded by 1.8% in CY07 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) and decline in raw material costs, staff costs and other expenses (as percentage of sales). Going forward, while we do not foresee a significant rise in operating margins from further cost reduction, the company is aiming to maintain margins by improving its product mix.

    Cost break-up
    (% of sales) 4QCY06 4QCY07 CY06 CY07
    Raw material consumption 40.4% 40.2% 41.1% 40.3%
    Staff cost 11.0% 8.5% 9.9% 9.6%
    Other expenses 20.7% 21.1% 16.6% 16.0%

  • During the year, GSK Pharma received extraordinary income to the tune of Rs 2.4 bn on sale of the fine chemicals business to Thermo Electron LLS India Pvt Ltd. Similarly, in CY06, the company had received income of Rs 2 bn on sale of its animal health business. Excluding the impact of these extraordinary items, the bottomline has grown by 10.5% and has outpaced topline growth, duly helped by the 29% YoY rise in other income.

What to expect?
At the current price of Rs 1,052, the stock is trading at a multiple of 19.2 times our estimated CY09 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. The company introduced 2 new products in CY07 and plans to introduce the anti-cancer drug ‘Tykerb’ and 2 vaccines namely ‘Cervarix’ and ‘Rotarix’ in the domestic market by CY08. 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. We maintain our positive view on the stock.

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