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GSK Pharma: Best margins in the MNC space - Views on News from Equitymaster
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GSK Pharma: Best margins in the MNC space
Jul 26, 2010

GSK Pharma has announced its 2QCY10 results. The company has reported 10% YoY and 4% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 10% YoY during 2QCY10 led by the company’s priority products.
  • EBDITA margins improve by 1.5% during the quarter due to lower raw material costs (as percentage of sales).
  • Bottomline grows by a mere 4% YoY due to considerable reduction in other income.


Financial performance: A snapshot
(Rs m) 2QCY09 2QCY10 Change 1HCY09 1HCY10 Change
Net sales 4,620 5,075 9.9% 9,229 10,541 14.2%
Expenditure 2,945 3,163 7.4% 5,871 6,572 11.9%
Operating profit (EBDITA) 1,674 1,913 14.2% 3,358 3,968 18.2%
EBDITA margin (%) 36.2% 37.7%   36.4% 37.6%  
Other income 374 202 -45.9% 636 586 -7.9%
Depreciation 40 41 2.3% 76 78 2.4%
Profit before tax 2,009 2,074 3.3% 3,918 4,476 14.2%
Tax 692 678 -2.0% 1,347 1,468 9.0%
Exceptional item (73) (106)   105 (106)  
Profit after tax/(loss) 1,244 1,290 3.7% 2,676 2,902 8.4%
Net profit margin (%) 26.9% 25.4%   29.0% 27.5%  
No. of shares (m)       84.7 84.7  
Diluted earnings per share (Rs)         63.2  
Price to earnings ratio (x)*         32.9  
(* on a trailing 12-month basis)

What has driven performance in 2QCY10?
  • GSK Pharma’s topline during the quarter grew by 10% YoY. This could be attributed to the double-digit growth of priority products. Having said that, the topline performance was impacted by constraints on vaccine supply during the quarter. For the half year, growth in sales stood at 14% YoY.

  • Operating margins improved by 1.5% 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 36.6% in 2QCY09 to 34.3% in 2QCY10. Staff costs, 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 a lukewarm 4 YoY during the quarter. This was lower than the 14% YoY growth in operating profits. Even after excluding the extraordinary items, growth was still muted at 6% YoY largely on account of the 46% YoY reduction in other income. For the half year, growth in net profits stood at 8% YoY.

What to expect?
At the current price of Rs 2,080, the stock is trading at a multiple of 25.5 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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