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GSK Pharma: Weak start to the year - Views on News from Equitymaster
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GSK Pharma: Weak start to the year
Apr 22, 2014

GSK Pharma has announced its 1QCY14 results. The company has reported a 5% YoY and 43% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline declines by 5% YoY during the quarter, largely due to the impact of the new pricing policy.
  • Operating margins decline by 7.7% during the quarter due to increase in overall operating costs.
  • Led by the fall in operating profits and lower other income, bottomline falls by 42.9% YoY.

Financial performance: A snapshot
(Rs m) 1QCY13 1QCY14 Change
Net sales 6,321 5,999 -5.1%
Other operating income 47 100 111.0%
Expenditure 4,693 5,023 7.0%
Operating profit (EBDITA) 1,676 1,076 -35.8%
EBDITA margin (%) 27.3% 19.6%  
Other income 770 448 -41.8%
Depreciation 42 43 1.9%
Profit before tax 2,404 1,482 -38.4%
Exceptional gain/(loss) (16) -  
Tax 698 517 -26.0%
Profit after tax/(loss) 1,690 965 -42.9%
Net profit margin (%) 26.7% 16.1%  
No. of shares (m)   84.0  
Diluted earnings per share (Rs)   51.1  
Price to earnings ratio (x)*   48.6  
*based on trailing 12 months earnings
What has driven performance in 1QCY14?
  • The net sales of GSK Pharma witnessed fell by 5% YoY. However, the other operating income witnessed robust growth of 111% YoY. Net sales comprises of core pharmaceuticals segment. Due to implementation of the new drug pricing policy, the company continued to face growth challenges during the quarter.

  • Overall, operating margins declined by 7.7% YoY for 1QCY14. The operating margins of the core pharmaceutical segment stood at 16.3%, down by 9.5% for the said period. Increase in overall costs and decline in sales impacted the company's operating profits.

  • The bottom line of the company declined by 43% YoY largely as a result of the poor operating performance and fall in other income by 42% YoY. Although taxes also declined by almost 26% YoY, it was enough to arrest the fall in the bottomline.

What to expect?
At the current price of Rs 2,485, the stock is trading at a multiple of 23.4 times our estimated CY15 earnings. The new pricing policy has impacted the company's revenues. The growing competition in the Indian domestic market too is likely to remain a challenge for the company. And with its higher dependence on the acute segment and largely in the anti-infective segment there are concerns with respect to its growth going forward. In addition to this, the current valuations do not offer any upside and hence we reiterate Sell rating on the stock. It must be noted that we had also recommended that investors offload their holdings when the company had come out with the open offer. Given that GSK Pharma is a December ending company, we shall soon update our financial model with our projections for CY16.

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