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GSK Pharma: Topline growth impresses - Views on News from Equitymaster
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GSK Pharma: Topline growth impresses
Oct 28, 2010

GSK Pharma has announced its 3QCY10 results. The company has reported 14% YoY and 12% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 14% YoY during 3QCY10 led by the company’s priority products and vaccines.
  • EBDITA margins dip by 1.1% during the quarter due to higher raw material costs and other expenses (as percentage of sales).
  • While PBT grows by 14% YoY bolstered by other income, growth in bottomline is lower at 12% YoY due to higher tax expenses.

Financial performance: A snapshot
(Rs m) 3QCY09 3QCY10 Change 9mCY09 9mCY10 Change
Net sales  5,183 5,893 13.7% 14,412 16,433 14.0%
Expenditure  3,230 3,733 15.6% 9,101 10,305 13.2%
Operating profit (EBDITA)  1,953 2,160 10.6% 5,311 6,128 15.4%
EBDITA margin (%) 37.7% 36.6%   36.9% 37.3%  
Other income 168  256 51.7%  804  841 4.6%
Depreciation   40  41 2.8%  116  119 2.5%
Profit before tax  2,081 2,374 14.1% 5,999 6,850 14.2%
Tax 671  792 18.0% 2,018 2,259 12.0%
Exceptional item    -     (4)    105  (111)  
Profit after tax/(loss)  1,411 1,578 11.9% 4,087 4,480 9.6%
Net profit margin (%) 27.2% 26.8%   28.4% 27.3%  
No. of shares (m)       84.7 84.7  
Diluted earnings per share (Rs)         65.1  
Price to earnings ratio (x)*         35.1  

What has driven performance in 3QCY10?
  • GSK Pharma’s topline during the quarter grew by 14% YoY. This was attributed to the strong growth reported by mass markets, mass specialities and specialities businesses. Vaccines also did well during the quarter. New products launched in the last 2 years also contributed to growth. For the nine month period, growth in sales stood at 14% YoY.

  • Operating margins dipped 1.1% during the quarter due to higher raw material costs (as a percentage of sales). These rose from 34.8% of sales in 3QCY09 to 36.7% in 3QCY10. Staff costs, on the other hand, reduced. For the nine month period, operating margins improved by 0.4% to 37.3%. The company’s operating margins are the best when compared to its MNC peers and we expect them to improve going forward. This will largely be led by changes in its product mix as opposed to any cost reduction.

  • PBT grew by 14% YoY during the quarter and was faster than the growth in operating profits due to higher other income. In comparison, growth in net profits came in a tad lower at 12% YoY due to higher tax expenses. For the nine month period, growth in net profits (excluding the extraordinary items) stood at 15% YoY.

What to expect?
At the current price of Rs 2,285, the stock is trading at a multiple of 28 times our estimated CY12 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. 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. The company has done better than our estimates on the topline front and we shall have to upgrade our numbers for the full year accordingly. That said, despite future growth prospects, current valuations do not leave much on the table for investors.

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