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GSK: Restructuring benefits palpable

Jul 29, 2002

MNC pharma major Glaxo has reported robust numbers for 2QFY03. Sales growth has been more than 20% from Rs2.5 bn to Rs 3 bn, driven mainly by focus on high growth products. The highlight of results was a sharp rise in operating margins of the company by almost 1,370 basis points. The rise in operating margins is due to combination of restructuring benefits, reduction in employee costs and focus on high margin products.

(Rs m) 2QFY02 2QFY03 %Change
Sales 2,268 2,722 20.0%
Other Income 149 95 -36.2%
Expenditure 2,089 2,133 2.1%
Operating Profit (EBDIT) 179 589 229.0%
Operating Profit Margin (%) 7.9% 21.6%  
Interest - - NA
Depreciation 47 47 -1.1%
Profit before Tax 281 637 126.6%
Extraordinary Income 268 (2)  
Tax 99 231 132.7%
Profit after Tax/(Loss) 450 405 -10.0%
Net profit margin (%) 19.8% 14.9%  
No. of Shares (eoy) (m) 74 74  
Diluted Earnings per share* 24.2 21.7  
P/E (at current price)   17.8  
(*- annualised)      

In a conscious decision, Glaxo discontinued its rural operations and hived off several tail end brands. A better product mix and a price rise in some of its key brands helped the company in recording a substantial rise in operating profits. The results indicate that the restructuring efforts of the company are yielding results. Improved resource allocations of marketing spend, tight control on expenses and synergies from integration and reduction in staff numbers due to manufacturing rationalisation, coupled with control on the field staff and back office headcount have helped improve profits. Glaxo's management had earlier indicated that the company intends to double its operating margins over a three year period. However, we believe that a substantial portion of increase in sales is on account of de-stocking exercise initiated by the company last year and hence may not be sustainable.

The second quarter results have been marginally above our expectations. We expect margins to stabilise around 17-18%. Till further clarity emerges on the sustainability of the sales growth and the exact impact of the DPCO, we maintain our FY03E EPS estimate of Rs 19.8. At the current market price of Rs 386, the stock trades at 19x FY03E earnings.

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