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GSK Pharma: Margins take a small hit - Views on News from Equitymaster
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GSK Pharma: Margins take a small hit
May 4, 2009

Performance summary
  • Revenues grow by 9% YoY during the quarter led by the company’s priority products.
  • EBDITA margins decrease marginally by 0.8% due to higher raw material costs and other expenditure (as percentage of sales).
  • Bottomline registers growth of 18% YoY during the quarter on account of extraordinary income. If one excludes the same during both the periods, net profits register an 8% YoY growth.


Financial performance: A snapshot
(Rs m) 1QCY08 1QCY09 Change
Net sales 4,242 4,610 8.7%
Expenditure 2,660 2,926 10.0%
Operating profit (EBDITA) 1,582 1,684 6.4%
EBDITA margin (%) 37.3% 36.5%  
Other income 224 262 16.8%
Depreciation 37 37 -1.1%
Profit before tax 1,770 1,909 7.9%
Tax 608 655 7.7%
Exceptional item 51 178 249.8%
Profit after tax/(loss) 1,213 1,433 18.1%
Net profit margin (%) 28.6% 31.1%  
No. of shares (m) 84.7 84.7  
Diluted earnings per share (Rs)**   54.5  
Price to earnings ratio (x)*   21.5  
(* on a trailing 12-month basis)   (** excluding extraordinary items)

What has driven performance in 1QCY09?
  • GSK Pharma’s topline during the quarter grew by 9% YoY. This was due to active promotion of priority products including vaccines (accounting for one third of revenues), which registered a double-digit growth.

  • Operating margins declined marginally by 0.8% in 1QCY09 due to a rise in raw material costs and other expenditure (as percentage of sales). The company’s operating margins are the best when compared to its MNC peers and while operating margins have reduced this quarter, 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 registered a growth of 18% YoY during 1QCY09 largely due to extraordinary income received during the quarter. This income included profit on sale of property and actuarial gain on employee benefits. However, if one excludes the extraordinary income during both 1QCY08 and 1QCY09, net profits grew by 8% YoY led by higher other income.

What to expect?
At the current price of Rs 1,171, the stock is trading at a multiple of 17 times our estimated CY11 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. While the company launched ‘Carzec’ and ‘Arixtra’ in CY07 and the anti-cancer drug ‘Tykerb’ in CY08, it 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 from a long term perspective.

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