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GSK Pharma: Muted sales growth

May 11, 2012

GSK Pharma has announced its first quarter results for the calendar year 2012 (1QCY12). The company has reported 3.3% YoY growth in sales and net profits stood at Rs 1,226 m for 1QCY12 as against Rs 5 m in comparable quarter last year. Here is our analysis of the results.

Performance summary
  • Net sales grow just by 3.3% YoY due to intense competition in the anti-infective segment. Core pharma segment for GSK grew by 7% YoY
  • Operating margins (EBITDA) decrease by 490 bps (4.9%) to 30.8% mainly due to increase in raw material costs and pricing pressure
  • Profit before tax increases by 3% YoY due to higher other income. The company records net profits of Rs 1.2 bn as against Rs 5 m in 1QCY11 due to the impact of extraordinary items.

Financial performance: A snapshot
(Rs m) 1QCY11 1QCY12 Change
Net sales 6,098 6,299 3.3%
Expenditure 3,920 4,271 9.0%
Operating profit (EBIDTA) 2,179 2,028 -6.9%
EBDITA margin (%) 35.7% 32.2%  
Other income 511 733 43.5%
Depreciation 44 41 -7.0%
Profit before tax 2,645 2,720 2.8%
Tax (364) 562  
Exceptional Gain / (Loss) (3,005) (930)  
Profit after tax/(loss) 5 1,229  
Net profit margin (%) 0% 20%  
No. of shares (m) 84.7 84.7  
Diluted earnings per share (Rs)   78  
Price to earnings ratio (x)*   26  
*On trailing 12 month basis & excluding extraordinary items

  • GSK Pharma's net sales grew by a 3.3% YoY as the core pharmaceuticals business grew only by 7% YoY against the industry growth of 13-14% YoY. This was mainly due to poor performance in the anti-infectives segment. The anti-infectives industry as a whole had a poor quarter and thus GSK Pharma was impacted as well. However, the specialty business, which includes Oncology, Dermatology, Cardiovascular and Metabolics, did comparatively better. Overall, the acute segment, which contributes nearly 95% to the total revenues, continues to face stiff competition

  • Operating margins (EBITDA) fell by 3.5% to 32.2% mainly due to a huge increase of 400 bps in raw material cost. This was mainly due to higher prices and unfavorable product mix led by lower growth. The remaining increase was due to higher other expenditure.

  • Profit before tax increases by 3% YoY due to higher other income. At the net level, the company recorded profits of Rs 1.2 bn as against Rs 5 m in 1QCY11. This was due to the impact of extraordinary items during both the periods. The extraordinary expense in 1QCY11 was due to provisioning made for an on-going litigation with the central government for overcharging of Belamethosone bulk drugs and formulations. That in 1QCY12 was on account of rationalization initiatives undertaken at a manufacturing site.

What to expect?
At the current price of Rs 2,092, the stock is trading at a multiple of 22.8 times our estimated CY13 earnings. GSK Pharma has a strong product pipeline and brand building ability as shown in the past. It is also one of the best bet on the Indian Patent regime as it plans to launch new products from its parent's pipeline. The company intends to steadily introduce more products and move towards high margin products. Its focus on priority products (a third of its revenues), chronic therapy segment and brand acquisitions will augur well going forward. But even after taking into account the future growth prospects, current valuations do not leave much on the table for investors.

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