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GSK Pharma: Subdued start to the year - Views on News from Equitymaster
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GSK Pharma: Subdued start to the year
May 8, 2007

Performance summary
GSK Pharma (Glaxo) announced subdued results for the first quarter ended March 2007 (January to December fiscal). Topline declined during the quarter, largely due to the high base effect in 1QCY06 and the absence of revenues from the animal health business, which was divested during 3QCY06. An improved product mix led to the expansion in operating margins for the quarter. The 10% YoY growth in the bottomline was primarily led by higher other income and reduction in depreciation charges.

Financial performance: A snapshot
(Rs m) 1QCY06 1QCY07 Change
Net sales 4,262 4,215 -1.1%
Expenditure 2,851 2,764 -3.0%
Operating profit (EBDITA) 1,411 1,450 2.8%
EBDITA margin (%) 33.1% 34.4%  
Other income 222 272 22.4%
Depreciation 38 37 -3.2%
Profit before tax 1,596 1,686 5.7%
Exceptional item (22) -  
Tax 561 573 2.0%
Profit after tax/(loss) 1,012 1,113 10.0%
Net profit margin (%) 23.8% 26.4%  
No. of shares (m) 84.7 84.7  
Diluted earnings per share (Rs)*   43.6  
Price to earnings ratio (x)   26.5  
(* on a trailing 12-month basis)

What is the company’s business?
GSK Pharma is the largest pharma company in the Indian market with a share of 6.4% (Source: ORG-IMS Dec 2006). It is a 49% subsidiary of the US$ 46.5 bn Glaxo Group, the world's second-largest pharma company with an R&D war chest of US$ 5.7 bn. Glaxo's product portfolio boasts of some of the leading brands like Augmentin, Zinetac, Betnesol, Cobadex and Zevit in the domestic pharma market. The company underwent a restructuring exercise and effect of the same was evident in 2003 and 2004. It derives its revenues from pharmaceuticals and fine chemicals. In May 2006, the company sold off its animal healthcare business to a European company ‘Virbac’.

What has driven performance in 1QCY07?
Uninspiring topline: GSK Pharma’s topline declined during the quarter by 1% YoY, which was largely due to the high base effect in 1QCY06 (revenues were up 54% YoY) and the divestment of the animal healthcare business in 3QCY06. The core business of pharmaceuticals grew by 5% YoY. Active promotion of priority products (accounting for one third of revenues) and shift from the acute to the chronic disease segment has contributed to the growth in the pharmaceutical business.

Segmental snapshot
(Rs m) 1QCY06 1QCY07 Change
Pharmaceuticals 3,807 3,994 4.9%
PBIT margin (%) 37.3% 38.4%  
% of revenues 87.7% 92.4%  
Other businesses 532 327 -38.6%
PBIT margin (%) 17.9% 21.5%  
% of revenues 12.3% 7.6%  
Total revenues 4,339 4,321 -0.4%
PBIT margin (%) 34.9% 37.1%  

Margins improve: Operating margins expanded by 130 basis points in 1QCY07 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 (as percentage of sales). Going forward, we do not forsee a significant rise in operating margins, as there is not much upside from further cost reduction.

Cost break-up
(% of sales) 1QCY06 1QCY07
Raw material consumption 41.9% 39.8%
Staff cost 8.7% 9.5%
Other expenses 16.3% 15.7%

The bottomline picture: During the quarter, bottomline growth of 10% YoY has been led by the improvement in operating margins and rise in other income (up 22% YoY). Reduction in depreciation charges also played its part in propping up the bottomline.

Over the last few quarters: While the topline performance has been volatile, what is commendable is that the company, barring a few quarters, has managed to maintain margins at around 30% levels, which is the highest amongst the MNC pharma companies under our coverage.

Quarterly trend
(%) 4QCY05 1QCY06 2QCY06 3QCY06 4QCY06 1QCY06
Net sales growth 14.5% 54.3% -12.4% -5.1% -1.0% -1.1%
Operating profit margin 20.5% 33.1% 30.7% 32.1% 25.4% 34.4%
Net profit growth 79.3% 115.8% -12.0% -7.7% 60.0% 10.0%

What to expect?
At the current price of Rs 1,156, the stock is trading at a price to earnings multiple of 21.7 times our estimated CY08 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. The company has unveiled plans of introducing 3 new products in CY07 and plans to introduce 2 vaccines namely ‘Cervarix’ and ‘Rotarix’ in the domestic market by CY08. 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 shall soon update our research report on the company.

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