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GSK Pharma: Eyeing 2005

Mar 13, 2003

MNC Pharma major, GlaxoSmithKline (GSK), has reported encouraging profit growth numbers for the December quarter as well as the full year 2002. However, the topline growth was staid, owing to sluggishness in allied businesses like animal healthcare, fine chemicals and exports.

(Rs m)4QFY024QFY03ChangeFY02FY03Change
Net Sales2,6232,133-18.7%10,10310,4733.7%
Other Income5410697.0%27833821.6%
Total expenditure2,3551,923-18.3%9,0578,736-3.6%
Operating Profit (EBDIT)268209-21.8%1,0461,73766.1%
Operating Profit Margin (%)10.2%9.8%10.4%16.6%
Interest (net)-19-33--89-83-
Depreciation10946-57.6%257195-24.1%
Profit before Tax23230230.3%1,1561,96369.9%
Extraordinary items-527-251--313-304-
Tax10977-29.8%40367968.6%
Profit after Tax/(Loss)-404-26-440981123.0%
Effective tax rate (%)47.0%25.3%34.8%34.6%
Net profit margin (%)-15.4%-1.2%4.4%9.4%
No. of Shares (eoy) (m)74.574.574.574.5
Earnings per share*-21.7-1.45.913.2
*(annualised)
Current P/e ratio22.4

Its core business of pharmaceuticals (over 80% of sales) reported over 8.5% growth during the year, in line with the industry trend. The allied businesses recorded a drop of over 7% in sales during the year. Consequently, GSK finished FY03 with sub 4% topline growth (excluding excise). The performance in December quarter was even worse, as topline dipped nearly 19% YoY.

What GSK lost in topline terms, it made up by increasing efficiencies and hence operating margins. In FY03, operating margins improved by over 6% at 16.6%. As per the management, the improvement in margins is likely to continue as GSK has decided to concentrate on select profitable brands (i.e. not under DPCO), in a bid to give a fillip to its profitability. One would have thought that GSK is adopting the model adopted by many FMCG companies recently.

Cost break-up
(Rs m)4QFY024QFY03ChangeFY02FY03Change
Raw material1,4321,017-29.0%5,3115,031-5.3%
Staff cost29135020.2%1,3111,3130.1%
Other expenditure661570-13.8%2,5722,491-3.1%
Recovery of expenses(29)(13)-55.9%(136)(100)-26.9%
Total 2,3551,923-18.3%9,0578,736-3.6%

Post the merger with SmithKline, GSK has increasing looked to close down unviable plants and looked to increasing outsource manufacturing. Its looking at selling of property (of erstwhile SmithKline) and streamlining operations of both companies for optimal utilisation (through VRS). Consequently, the company's depreciation provisioning has come down quite significantly and the spurt in other income suggests that it is reaping the benefits of investible funds.

Extraordinary items break-up
(Rs m)FY02FY03
VRS and other retirement benefits(959)(312)
Loss/write off of fixed assets(35)(36)
Merger/rationalisation expenses(122)(51)
Increase in retirment benefit contribution-(90)
Profit on sale of plant and property394 71
Taxes on the above409 114
Total (313)(304)

Excluding extraordinary items, GSK would have reported 84% growth in net profits during the December quarter, and 71% growth in FY03. The details of these extraordinary items are given in the table above.

At the current price of Rs 296, the stock is trading at 22.4x FY03 earnings. The company is gearing itself towards 2005, when patent regime comes into force. The valuations look quite attractive seeing the company's focus and the strong brand name.

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