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Glaxo: Getting leaner

Jul 30, 2003

MNC Pharma major, GlaxoSmithKline (GSK), has improved its topline during the June quarter. After registering a 2.5% topline dip in the March quarter, the company has reported over 10% growth in the same during the June quarter. The company had attributed the topline dip in the March quarter to VAT concerns. Going by the June quarter performance it seems that the domestic pharma industry is back on track.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Net Sales 2,734 3,015 10.3% 5,390 5,603 4.0%
Other Income 96 135 41.4% 165 230 39.3%
Total expenditure 2,145 2,268 5.7% 4,421 4,357 -1.4%
Operating Profit (EBDIT) 589 747 26.7% 969 1,246 28.6%
Operating Profit Margin (%) 21.5% 24.8%   18.0% 22.2%  
Depreciation 47 44 -5.4% 94 88 -6.9%
Profit before Tax 638 838 31.3% 1,040 1,389 33.5%
Extraordinary items -2 123 - -32 123 -
Tax 231 313 35.8% 372 513 37.9%
Profit after Tax/(Loss) 406 648 59.7% 636 999 57.1%
Effective tax rate (%) 36.1% 37.4%   35.8% 36.9%  
Net profit margin (%) 14.8% 21.5%   11.8% 17.8%  
No. of Shares (eoy) (m) 74.5 74.5   74.5 74.5  
Earnings per share* 21.8 34.8   17.1 26.8  
Current P/e ratio   11.7     15.2  

Its core business of pharmaceuticals (over 80% of sales) reported 5.7% growth during first half of 2003, much above the industry growth rate of 2.5% during the period. Export sales during the half year declined by 47% mainly due to the discontinuation of Ranitidine exports post the Ankleshwar site closure. This had an impact on the company’s overall sales performance during the half year. Its other businesses recorded a drop of 12% in sales during six months. Consequently, GSK finished 1HFY04 with only a 4% topline growth (excluding excise).

Improving efficiencies continued to help GSK post higher operating margins. Though in the June quarter, material cost as a percentage of sales did see an uptick, for the overall first half of the year material cost as a percentage of sales stayed below 48% (49.3% in 1HFY03). The company's focus on power brands that are more profit making (i.e. not under DPCO) seems to be yielding results. In FY03, the company's operating margins had improved by over 6% at 16.6%. Continuing the trend, operating margins have improved from 18% to over 22% in the first half of FY04. Consequently, GSK finished 1HFY04 with a 34% growth at the PBT levels.

Segment revenue break-up
(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Pharmaceuticals 2,553 2,759 8.1% 4,882 5,162 5.7%
Others businesses 594 564 -5.0% 1,177 1,036 -12.0%
Total segment revenue 3,147 3,323 5.6% 6,058 6,198 2.3%

Post the merger with SmithKline, GSK has increasingly looked to close down unviable plants and also looked to increase outsourced manufacturing. It is looking at selling off property (of erstwhile SmithKline) and streamlining operations of both companies for optimal utilisation (through VRS). Consequently, the company's depreciation provisioning too has come down. The spurt in other income suggests that it is reaping the benefits of investible funds. GSK Consumer's estimated surplus cash stands at nearly Rs 2 bn.

Segment (PBIT) break-up
(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Pharmaceuticals 611 746 22.2% 961 1,218 26.8%
Others businesses 82 89 9.7% 167 158 -5.2%
Gross PBIT 692 836 20.7% 1,127 1,376 22.1%
Add: Interest income (net) 11 49 362.9% 24 91 273.3%
Less: Unallocable exp. (net) -65 -46 - -112 -78 -
Total PBIT 638 838 31.3% 1,040 1,389 33.5%

The extraordinary items mentioned in 1HFY04 represents Rs 123 m received as profit on sale of its Bangalore office property. The company is also in the process of selling its Mumbai property, which is estimated to fetch the company nearly Rs 1 bn over the next few quarters.

At the current price of Rs 385, the stock is trading at a P/E multiple of 14.4x its annualised 1HFY04 earnings. The company is gearing itself towards 2005, when the patent regime comes into force. The company is also likely to finalise the much awaited merger with Burroughs Wellcome soon.

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