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GSK Pharma: Growth is all around - Views on News from Equitymaster

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GSK Pharma: Growth is all around

Apr 28, 2010

GSK Pharma has announced its FY10 results. The company has reported 18.6% YoY and 12.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 19% YoY during 1QCY10 led by the company's priority products.
  • EBDITA margins improve by 1.1% during the quarter due to lower raw material costs (as percentage of sales).
  • Bottomline grows by 29% YoY (excluding extraordinary items) due to strong growth in operating profits and higher other income.

(Rs m) 1QCY09 1QCY10 Change
Net sales       4,610      5,465 18.6%
Expenditure       2,926      3,410 16.5%
Operating profit (EBDITA)       1,684      2,056 22.1%
EBDITA margin (%) 36.5% 37.6%  
Other income          262         383 46.3%
Depreciation            37           38 2.5%
Profit before tax       1,909      2,402 25.8%
Tax          655         790 20.6%
Exceptional item          178            -    
Profit after tax/(loss)       1,433      1,612 12.5%
Net profit margin (%) 31.1% 29.5%  
No. of shares (m)         84.7        84.7  
Diluted earnings per share (Rs)          62.6  
Price to earnings ratio (x)*          30.1  

What has driven performance in 1QCY10?
  • GSK Pharma's topline during the quarter grew by 19% YoY. This could be attributed to the double-digit growth of priority products including vaccines (accounting for one third of revenues). New product launches made could also have played a role in contributing to revenue growth.

  • Operating margins improved by 1.1% during the quarter and could be attributed to favourable changes in the product mix. This was evident from the fact that raw material costs (as a percentage of sales) fell from 40% in 1QCY09 to 37.2% in 1QCY10. Staff costs and other expenditure, on the other hand, increased. The company's operating margins are the best when compared to its MNC peers and we expect them to improve going forward. This will largely be led by changes in its product mix as opposed to any cost reduction.

  • The bottomline grew by 12.5% YoY during the quarter and was slower than the growth in operating profits. But this was largely due to the extraordinary income that the company received in 1QCY09. Thus, on excluding the same, net profits grew by 29% YoY led by strong performance at the operating level and higher other income.

What to expect?
At the current price of Rs 1,883, the stock is trading at a multiple of 22.8 times our estimated CY12 earnings. Going forward, GSK Pharma intends to continue its focus on 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. 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. Despite future growth prospects, current valuations do not leave much on the table for investors.

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