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GSK Pharma: The soaring margin effect - Views on News from Equitymaster
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GSK Pharma: The soaring margin effect
Jul 29, 2008

Performance summary
  • Revenues grow by a slower 5% YoY during the quarter due to the absence of the fine chemicals business, which was present in the corresponding quarter last year.
  • EBDITA margins jump by 5.4% led by an increased emphasis on improving the product mix.
  • Bottomline growth at 19% YoY is slower than the growth in operating profits due to a reduction in other income.


Financial performance: A snapshot
(Rs m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
Net sales 3,956 4,169 5.4% 8,171 8,350 2.2%
Expenditure 2,733 2,658 -2.8% 5,497 5,317 -3.3%
Operating profit (EBDITA) 1,223 1,511 23.6% 2,674 3,033 13.5%
EBDITA margin (%) 30.9% 36.3%   32.7% 36.3% 11.0%
Other income 312 259 -17.0% 584 600 2.7%
Depreciation 37 39 4.6% 74 76 3.1%
Profit before tax 1,498 1,731 15.6% 3,184 3,557 11.7%
Tax 534 583 9.2% 1,106 1,196 8.1%
Profit after tax/(loss) 964 1,149 19.1% 2,078 2,361 13.7%
Net profit margin (%) 24.4% 27.6%   25.4% 28.3%  
No. of shares (m) 84.7 84.7   84.7 84.7  
Diluted earnings per share (Rs)*         50.3  
Price to earnings ratio (x)         22.1  
(* on a trailing 12-month basis)

What has driven performance in 2QCY08?
  • GSK Pharma’s topline during the quarter grew by 5% YoY. It must be noted that revenues from the fine chemicals business were reflected in 2QCY07 and excluding the same, the growth in sales of the core pharmaceuticals business stood at a decent 11%. Active promotion of priority products (accounting for one third of revenues), which registered a double-digit growth, and shift from the acute to the chronic disease segment has contributed to the growth in the pharmaceutical business.

  • Operating margins improved significantly by 5.4% in 2QCY08 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 and other expenses (as percentage of sales). Going forward, we expect operating margins to improve and this will largely be led by changes in its product mix as opposed to any cost reduction.

    Cost break-up
    (% of sales) 2QCY07 2QCY08 1HCY07 1HCY08
    Raw material consumption 40.3% 38.0% 40.0% 38.6%
    Staff cost 10.7% 10.9% 10.1% 10.3%
    Other expenses 18.1% 14.8% 16.9% 14.8%

  • Considerable expansion in operating margins led to the decent 19% YoY growth in the bottomline. This growth was, however, slower than the growth in operating profits due to the 17% YoY decline in other income.

What to expect?
At the current price of Rs 1,116, the stock is trading at a multiple of 20.4 times our estimated CY09 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 through in-licensing opportunities and brand acquisitions. Continued emphasis will be placed on improving the product mix and focusing on higher margin products. The company introduced 2 new products in CY07 (‘Carzec’ and ‘Arixtra’) and introduced the anti-cancer drug ‘Tykerb’ in CY08. Other plans on the anvil include the launch of an in-licensed cardiovascular product and the vaccine ‘Rotarix’ (for treating diarrhea in children) in the domestic market by CY08. The company has identified the new products (‘Tykerb’, ‘Carzec’ and ‘Arixtra’) and the new vaccines to be the key growth drivers for CY08.

Besides this, the company has envisaged launching 3 more new drugs and 3 vaccines in the domestic market in CY09 and CY10. 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 maintain our positive view on the stock.

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