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GSK India: What would it look like

Oct 25, 2001

Glaxo India has just declared its financial results for nine months ended 30th September’01. As the merger of the company with SmithKline Pharma became effective from the beginning of the calendar year, the performance of the company is inclusive with that of SmithKline Beecham Pharma Ltd. On a merged basis, the company declared a drop in turnover by around 13% and drop in PBT by around 36%. Operating margins are finding difficult to cross the double-digit mark.

  • Click here for detailed financial performance.

    Apart from sluggish domestic pharma market, the poor performance of the company has been due to three major reasons:

    • Both the companies initiated a major rejuvenation to align their product portfolio and focus on high margin products. In this exercise, Glaxo did away with a number of low margin products.

    • Glaxo India also undertook a restructuring exercise in terms of shifting its manufacturing base from high cost centers, strategic change in sales and marketing structure and higher focus on creating brands. The sales division of the company was changed to ‘therapy focused’ marketing.

    • Glaxo declared a major VRS drive to achieve operational cost benefits with that of SmithKline Pharma. It also attempted to restructure salary structure differences between the two organisations to achieve smooth integration.

    The company has already incurred VRS and integration/restructuring activities related cost of Rs 80 m and Rs 102 m respectively, till date. The company is expected to incur an additional VRS cost of Rs 750 m on its Worli factory in the coming quarters.

    A new entity Glaxo SmithKline Beecham Ltd (GSK) will be created and soon be listed on the bourses. The shareholders of Glaxo and SmithKline would be allotted shares in GSK Ltd in the ratio of 2:1 (i.e. 1 share of Glaxo= 1 share of GSK and 2 share of SmithKline = 1 share of GSK Ltd). The merger would become effective on the BSE on November 9, 2001.

    Assuming that additional VRS expenses would be incurred in FY02 in the books of GSK India and excluding any extra-ordinary gains from sale of property, GSK’s snapshot can be depicted as shown in the table below.

    GSK India - What would it look like
      FY02E FY03E
    Sales (Rs m) 11,050 12,089
    Net Profit (Rs m)* 54 896
    Expected EPS (Rs) 0.7 12
    Current Market Cap. (Rs m) 18,829  
    Market Cap/Sales 1.7 1.6
    (* After deducting Rs 750 m on account of expected VRS expenses)

    In the near term, the financials of the company are expected to suffer from the integration pain. Also, the operational cost benefits from the merger are expected to take time before they become visible.

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