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Glaxo: Other income fillip - Views on News from Equitymaster

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Glaxo: Other income fillip

Oct 29, 2004

Performance summary
MNC pharma major, Glaxo (GSK Pharma), reported 20% growth in revenues in 3QCY04. Consequently, the company finished the nine month period ended September 2004 with revenue growth of nearly 14% YoY. The bottomline of the company grew by almost three fold on back of extraordinary income from sale of its Worli (Mumbai) property. The operating margin also saw an expansion of nearly 7%.

(Rs m) 3QCY03 3QCY04 Change 9mCY03 9mCY04 Change
Net sales 3,114 3,736 20.0% 8,728 10,934 25.3%
Expenditure 2,328 2,556 9.8% 6,730 7,739 15.0%
Operating profit (EBDITA) 786 1,180 50.1% 1,998 3,195 59.9%
Operating profit margin (%) 25.2% 31.6%   22.9% 29.2%  
Other income 141 113 -19.7% 411 392 -4.6%
Interest - -   - -  
Depreciation 43 42 -2.3% 130 122 -6.2%
Profit before tax 885 1,252 41.5% 2,278 3,465 52.1%
Exceptional Item - 934   123 873  
Tax 312 461 47.7% 825 1,243 50.6%
Profit after tax/(loss) 573 1,725 201.2% 1,576 3,096 96.4%
Net profit margin (%) 18.4% 46.2%   18.1% 28.3%  
No. of shares (m) 74.7 74.7   74.7 74.7  
Diluted earnings per share (Rs)*       28.1 55.2  
P/E ratio (x)         12.3  
(*annualised)            

Whatís the companyís business?
GSK Pharma is the largest pharma company in the Indian market with a share of 6.3%. It is a 49% subsidiary of US$ 37 bn Glaxo group - the world's second largest pharma company with a R&D chest of US$ 4 bn. GSK's product portfolio boasts of some of the leading brands like Zinetac, Betnesol, Cobadex and Zevit in the domestic pharma market. Most of the company's products face stiff price competition from domestic players and growth in the company has been a key area of concern off late. The company underwent a restructuring exercise and effect of the same was evident in its 2003 results. It derives its revenues from two segments viz. pharmaceuticals and others (animal healthcare). The parent has recently signaled its willingness to launch new products in the Indian market post the introduction of the new patent regime.

What has driven performance in 3QCY04?
Buoyancy backed by merger gains:  The pharmaceutical segment grew by 21% owing to the effect of merger of Burroughs Wellcome with the company. If one excludes this, the company has grown by approximately 13% on a like to like basis during the quarter. However, total revenue growth was impacted by the decline the animal health care business (down 1.5% YoY in 3QCY04). This business segment accounts for about 17% of revenues. However, going forward, we expect growth to accelerate from new product launches towards the end of the calendar year in CVS, CNS and diabetology segments. T

Cost break-up...
Cost Structure 3QCY03 3QCY04 Change
Raw Material 1,407 1,531 8.8%
(as % of sales) 45.2% 41.0%  
Staff Cost 343 376 9.6%
(as % of sales) 11.0% 10.1%  
Others 578 649 12.4%
(as % of sales) 18.5% 17.4%  
Total 2,328 2,556 9.8%

Impressive margin expansion:  There was a 660 basis-point expansion in operating margins, mainly on account of higher contribution from power brands. The gross margin has expanded on account of savings from all fronts. The effect of VRS has also been showing up, as the employee cost as a percentage of sales is down by 100 basis points. Also, better product mixed has helped the company save raw material costs.

Net profit:  At the net profit level, profit margin increased three fold. However, this should be viewed in the context of extraordinary income of Rs 934 m, which largely accrued from the sale of Worli (Mumbai) property of the company. If one excludes the effect of extraordinary income, net margins have increased by 260 basis points or 2.6%.

Over last few quarters

Over the last few quarters the margins, both at operating and net levels, have improved owing to the restructuring exercise undertaken by the company in the last few years. However, it seems that the company has now achieved the pinnacle of margins and the growth in the bottomline may now come from the topline growth.

What to expect?
The stock is trading at Rs 678 implying a P/E multiple of 14 times annualised 9mCY04 earnings. The stock might look cheap at the current valuation but investors should exercise caution considering the fact that the EPS also incorporates Rs 12 per share from the property sale. Excluding the extraordinary income, the stock trades at 17 times annualised 9mCY04 earnings.

The company's core business has done very well. The effect of restructuring is reflected in the last few quarters and the impending transition into the patent regime will result in the company launching new products from the parentís portfolio. Going forward, the company is also likely to start clinical trials, which indicates the growing interest of the parent towards India.


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