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GSK Pharma: Margins at the forefront - Views on News from Equitymaster
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GSK Pharma: Margins at the forefront
Apr 22, 2008

Performance summary
  • Revenues decline by 1% YoY in 1QCY08 largely owing to the sale of the fine chemicals business.
  • EBDITA margins improve by 2% led by an increased emphasis on improving the product mix.

  • Led by the strong performance at the operating level and higher other income, bottomline posts a 9% YoY growth.

Financial performance: A snapshot
(Rs m) 1QCY07 1QCY08 Change
Net sales 4,215 4,181 -0.8%
Expenditure 2,764 2,659 -3.8%
Operating profit (EBDITA) 1,450 1,522 4.9%
EBDITA margin (%) 34.4% 36.4%  
Other income 272 341 25.4%
Depreciation 37 37 1.6%
Profit before tax 1,686 1,826 8.3%
Tax 573 613 7.0%
Profit after tax/(loss) 1,113 1,213 8.9%
Net profit margin (%) 26.4% 29.0%  
No. of shares (m) 84.7 84.7  
Diluted earnings per share (Rs)*   48.1  
Price to earnings ratio (x)   21.1  
(* on a trailing 12-month basis)

What has driven performance in 1QCY08?
  • GSK Pharma’s topline during the quarter declined by 1% YoY. It must be noted that revenues from the fine chemicals business were reflected in 1QCY07 (this business was divested in 2QCY07) and excluding the same, the growth in sales of the core pharmaceuticals business stood at a much better 5.3%. That said, the company was also impacted by certain pipeline inventory adjustments in March 2008 on account of excise related price changes. 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.

  • Operating margins expanded by 2% in 1QCY08 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 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.

    Cost break-up
    (% of sales) 1QCY07 1QCY08
    Raw material consumption 39.8% 39.2%
    Staff cost 9.5% 9.6%
    Other expenses 15.7% 14.7%

  • Despite the muted performance at the topline level, considerable expansion in operating margins led to the decent 9% YoY growth in the bottomline. This growth was higher than the growth in operating profits due to the 25% YoY growth in other income.

What to expect?
At the current price of Rs 1,018, the stock is trading at a multiple of 18.6 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 through in-licensing opportunities and brand acquisitions. Continued emphasis will be placed on improving the product mix and focusing on higher margin products. The company introduced 2 new products in CY07 (‘Carzec’ and ‘Arixtra’) and plans to introduce the anti-cancer drug ‘Tykerb’, an in-licensed cardiovascular product and the vaccine ‘Rotarix’ (for treating diarrhea in children) in the domestic market by CY08. The company has identified the new products (‘Tykerb’, ‘Carzec’ and ‘Arixtra’) and the new vaccines to be the key growth drivers for CY08.

Besides this, the company 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. We maintain our positive view on the stock.

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