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GSK Pharma: Poor Performance

May 10, 2013

GSK Pharma has announced its 1QCY13 results. The company has reported 1.3% YoY growth in sales and 37.5% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline (including operating income) grows by 1.3% YoY during the quarter with its core pharmaceuticals business growing marginally by 1.5% YoY.
  • Operating margins decline by 5.8% to 26.3% in 1QCY13 due to increase in operating expenses and decline in operating income.
  • Bottomline increases by 37.5% YoY during 1QCY13 due to higher exceptional loss in 1QCY12. Adjusting the exceptional impact, bottomline declines by approximately 21%.

Standalone financial performance
(Rs m) 1QCY12 1QCY13 Change
Net sales 6,228 6,321 1.5%
Operating Income 58 47 -17.7%
Expenditure 4,271 4,693 9.9%
Operating profit (EBDITA) 2,015 1,676 -16.8%
EBDITA margin (%) 32.1% 26.3%  
Other income 747 770 3.1%
Depreciation 41 42 1.2%
Exceptional gain/(loss) (930) (16)  
Profit before tax 1,791 2,389 33.4%
Tax 562 698 24.4%
Profit after tax/(loss) 1,229 1,690 37.5%
Net profit margin (%) 19.7% 26.7%  
No. of shares (m)   847.0  
Diluted base earnings per share (Rs)   73.7  
Price to earnings ratio (x)*   31.3  
*based on trailing 12 months earnings

What has driven performance in 1QCY13?
  • Topline (including operating income) grows by 1.3% YoY during the quarter with its core pharmaceuticals business growing marginally by 1.5% YoY. The company's growth was much below the industry growth rate. The muted performance was largely due to supply chain related issues in its core pharmaceuticals business during the quarter.

  • Operating margins declined by 5.7% to 26.3% in 1QCY13 due to increase in operating expenses and decline in operating income. The material costs increased by 4.3%, while staff costs and other expenses grew by 21.5% and 17.1% respectively.

  • Bottomline increased by 37.5% YoY during 1QCY13 due to higher exceptional loss in 1QCY12. This helped in the PAT margins improvement of 7%. However, adjusting for the exceptional impact, bottomline declined by around 21% with margins declining by approximately 8%.

What to expect?
At the current price of Rs 2,310, the stock is trading at a multiple of 22.5 times our estimated CY15 earnings. GSK Pharma has a strong product pipeline and brand building ability as shown in the past. The company is focusing on launching high margin products going forward . However, as the company is highly exposed to the pricing policy, its revenues will get impacted once the proposed policy gets cleared. Secondly, its higher dependence on the acute segment and largely in anti-infective segment raises concerns about its growth going forward. Most importantly, valuations are expensive. We thus reiterate our SELL rating on the stock.

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