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GSK Pharma: Best margins in MNC pharma
Jul 29, 2009

Performance summary
  • Revenues grow by 10% YoY during the quarter led by the company’s priority products.
  • EBDITA margins decrease marginally by 0.7% due to higher staff costs and other expenditure (as percentage of sales).
  • Bottomline registers growth of 8% YoY during the quarter on account of an extraordinary expense this quarter as compared to gains in 2QCY08. If one excludes the same during both the periods, net profits register a 16% YoY growth bolstered by higher other income.


Financial performance: A snapshot

(Rs m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
Net sales 4,209 4,620 9.7% 8,451 9,229 9.2%
Expenditure 2,658 2,945 10.8% 5,317 5,871 10.4%
Operating profit (EBDITA) 1,552 1,674 7.9% 3,134 3,358 7.2%
EBDITA margin (%) 36.9% 36.2%   37.1% 36.4%  
Other income 201 374 86.0% 425 636 49.5%
Depreciation 39 40 1.5% 76 76 0.3%
Profit before tax 1,714 2,009 17.2% 3,483 3,918 12.5%
Tax 583 692 18.8% 1,191 1,347 13.1%
Exceptional item 18 (73)   69 105 53.3%
Profit after tax/(loss) 1,149 1,244 8.3% 2,361 2,676 13.3%
Net profit margin (%) 27.3% 26.9%   27.9% 29.0%  
No. of shares (m)       84.7 84.7  
Diluted earnings per share (Rs)**         55.6  
Price to earnings ratio (x)*         24.3  
(* on a trailing 12-month basis)
(** excluding extraordinary items)

What has driven performance in 2QCY09?
  • GSK Pharma’s topline during the quarter grew by 10% YoY. This could be attributed to the active promotion of priority products including vaccines (accounting for one third of revenues), which registered a double-digit growth. New product launches made last year could also have played a role in contributing to revenue growth. For the half year period, sales registered a 9% YoY growth.

  • Operating margins declined marginally by 0.7% in 1QCY09 due to a rise in staff costs and other expenditure (as percentage of sales). Staff costs increased from 10.8% of sales in 2QCY08 to 11.4% in 2QCY09. For the half year period too, operating margins shrank by 0.7%. The company’s operating margins are the best when compared to its MNC peers and while they have reduced this quarter, 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 registered a growth of 8% YoY during 2QCY09 largely due to an extraordinary expense during the quarter as compared to gains in 2QCY08. Thus, on excluding the same during both the periods, net profits register a 16% YoY growth bolstered by higher other income. For the half year period, however, the company reported extraordinary income which included profit on sale of property and actuarial gain on employee benefits and on excluding the same during both the periods, net profits grew by 12% YoY.

What to expect?
At the current price of Rs 1,353, the stock is trading at a multiple of 19.7 times our estimated CY11 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. While the company launched ‘Carzec’ and ‘Arixtra’ in CY07 and the anti-cancer drug ‘Tykerb’ in CY08, it 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 GSK Pharma from a long term perspective.

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