SmithKline tumbles on import duty hurdle - Views on News from Equitymaster

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SmithKline tumbles on import duty hurdle

Apr 28, 2000

SmithKline Pharmaceutical has reported disappointing results for the first quarter ended March 2000. While the turnover has declined by 22%, the net profit has actually halved from what was achieved in the corresponding quarter of the last year.During last year’s budget the government had imposed a basic import duty of 35% on Engerix (the Hepatitis B vaccine that the company produces). If one takes into account the special additional duty and the surcharge the duty goes up to almost 42.5%. SmithKline was adversely hit since it imports the vaccine from its parent’s Belgian plant.

The company took a hit on the margins rather than increase the price of the vaccine. This was in view of the competition from the likes of Shanta Biotech (which tied up with Pfizer for marketing) and Wockhardt. Even Hoechst Marion Roussel plans to introduce a Hep–B vaccine in the current year, which would further intensify the competition in this segment.

Besides, Zevit (B complex vitamin) which contributes around 15% of the turnover was also was also brought under price control during 1999. The company was forced to reduce the prices of the product by almost 50%. This has hit the turnover and the margins further.

(Rs m)FQFY99FQFY00Change
Sales 879 681 -22.6%
Other Income 20 24 21.1%
Expenditure 790 642 -18.8%
Operating Profit (EBDIT) 89 39 -56.4%
Operating Profit Margin (%)10.1%5.7% 
Interest 1 0 -67.6%
Depreciation 5 10 111.8%
Profit before Tax 103 52 -49.3%
Other Adjustments   
Tax 24 13 -44.7%
Profit after Tax/(Loss) 80 39 -50.7%
Net profit margin (%)9.1%5.8% 
Earnings per share* 10.83 5.34  
(annualised)   

The company has also explained that lower export sales as a result of order phasing as compared to the same quarter of last year also contributed to the de–growth in sales.

‘Iodex’ the company flagship over the counter brand also seems to have recorded relatively lower growth in the light of competition from ‘Moov’, ‘Amritanjan’ and ‘Tiger Balm’. However two other vaccines ‘Havrix’ for Hepatitis A and ‘Varilix’ for chicken pox have done reasonably well and are expected to contribute almost 15% of the company’s turnover.

However the full year impact of the customs duty on Engerix and the price control on Zevit would more than nullify the growth from the two new vaccines. One way out for SmithKline would be to introduce new products from the parent’s stable. Avandia, the parent’s anti–diabetes blockbuster is slated to be introduced in India. However, the vehicle that the parent will use (whether the 100% subsidiary or the listed company) is still open to question.

The stock currently quotes at Rs 188 at an earnings multiple of 33.7 times. This is more than half the earnings multiple it was quoting at last year.

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