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GSK Pharma: Subdued performance - Views on News from Equitymaster

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GSK Pharma: Subdued performance
Aug 25, 2014

GSK Pharma has announced its 2QCY14 results. The company has reported a marginal growth of 2.8% YoY in net sales and a decline of 14.7% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by just 2.8% YoY, as the pricing policy continues to impact the company’s performance.
  • Operating margins decline by 1.6% to 17.3% due to decline in operating income and increase in overall expenses.
  • Bottomline is down by 14.7% YoY for the quarter due to exceptional gain in 2QCY13, which is not present this quarter.

Financial performance: A snapshot
(Rs m) 2QCY13 2QCY14 Change 6MCY13 6MCY14 Change
Net sales 6,369 6,549 2.8% 12,690 12,548 -1.1%
Operating Income 85 48 -43.1% 133 148 12.0%
Expenditure 5,232 5,456 4.3% 9,925 10,478 5.6%
Operating profit (EBDITA) 1,222 1,141 -6.6% 2,898 2,218 -23.5%
EBDITA margin (%) 18.9% 17.3%   22.6% 17.5%  
Other income 368 398 8.3% 1,138 847 -25.6%
Depreciation 48 50 3.5% 92 93 1.2%
Exceptional gain/(loss) 201 -   185 -  
Profit before tax 1,742 1,490 -14.5% 4,130 2,973 -28.0%
Tax 591 508 -14.1% 1,289 1,024 -20.5%
Profit after tax/(loss) 1,151 982 -14.7% 2,841 1,948 -31.4%
Net profit margin (%) 18.1% 15.0%   22.4% 15.5%  
No. of shares (m)         847.0  
Diluted base earnings per share (Rs)         49.3  
Price to earnings ratio (x)*         50.4  
*based on trailing 12 months earnings

What has driven performance in 2QCY14?
  • Net sales increases by 2.8% YoY. Company generates large part of its revenues from core pharmaceuticals segment. Like other pharma companies, the growth is impacted by the implementation of new pricing policy. Company’s brands like Banocide tablets, Calpol, Lanoxin tablets and Zovirax have come under pricing pressure.

  • On the back of pricing policy, the operating margins too have continued to remain under pressure. Operating margins declined by 1.6% due to decline in operating income and increase in overall expenses. Excluding other operating income, the margins were down by 1.1% for the quarter.

  • Bottomline declined by 14.7% YoY for the quarter due to exceptional gain in 2QCY13, which was not present this quarter. Excluding the one-off gain, the profits were still down by 3% YoY on account of the fall in operating profits.
What to expect?
At the current price of Rs 2,486, the stock is trading at a multiple of 35.3 times our estimated CY16 earnings. GSK Pharma has a strong product pipeline and brand building ability as shown in the past. However, large part of the company’s portfolio is exposed to the pricing policy, and hence its revenues are getting impacted and margins have also come under pressure. Further, as the government targets more drugs under pricing control, this will remain a concern for GSK Pharma too. Over and above, its higher dependence on the acute segment and that too largely in anti-infectives raises concern about its growth going forward. Most importantly, valuations are expensive. We thus reiterate our SELL rating on the stock.

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