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GSK Pharma: The margin upswing - Views on News from Equitymaster
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GSK Pharma: The margin upswing
Oct 31, 2008

Performance summary
  • Revenues grow by 9% YoY during the quarter. Excluding the fine chemicals business, which was present during 3QCY07, revenues grow by 15% YoY.
  • EBDITA margins increase by 2.1% led by an increased emphasis on improving the product mix.
  • Bottomline declines by 47% YoY largely due to the extraordinary income received in 3QCY07. Excluding the same, net profits grow by 21% YoY led by the strong performance at the operating level and higher other income.

Financial performance: A snapshot
(Rs m) 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
Net sales 4,245 4,637 9.2% 12,494 13,089 4.8%
Expenditure 2,720 2,873 5.6% 8,028 8,190 2.0%
Operating profit (EBDITA) 1,525 1,764 15.7% 4,466 4,899 9.7%
EBDITA margin (%) 35.9% 38.0%   35.7% 37.4% 4.7%
Other income 180 254 40.8% 496 752 51.6%
Depreciation 38 40 6.4% 111 116 4.2%
Profit before tax 1,667 1,978 18.6% 4,851 5,535 14.1%
Tax 576 658 14.2% 1,683 1,854 10.2%
Exceptional item 1,399 -   1,399 -  
Profit after tax/(loss) 2,490 1,320 -47.0% 4,568 3,681 -19.4%
Net profit margin (%) 58.7% 28.5%   36.6% 28.1%  
No. of shares (m)       84.7 84.7  
Diluted earnings per share (Rs)*         53.0  
Price to earnings ratio (x)         18.8  
(* on a trailing 12-month basis)

What has driven performance in 3QCY08?
  • While GSK Pharma’s topline during the quarter grew by 9% YoY, excluding the fine chemicals business which was present in 3QCY07 and not present this quarter, sales on a like-to-like basis stood at 15% YoY. Active promotion of priority products including vaccines (accounting for one third of revenues), which registered a double-digit growth contributed to the growth in the pharmaceutical business.

  • Operating margins improved by 2.1% in 3QCY08 owing to an improvement in the product mix (the company has been concentrating on increasing its focus on priority products as these are not under price control), higher volumes and decline in raw material costs and other expenses (as percentage of sales). Going forward, we expect operating margins to improve and this will largely be led by changes in its product mix as opposed to any cost reduction.

  • While the bottomline declined by 47% YoY during 3QCY08, this was largely due to the extraordinary income that the company received during 3QCY07. Excluding the same, net profits grew by a robust 21% YoY led by the strong performance at the operating level and higher other income.

What to expect?
At the current price of Rs 996, the stock is trading at a multiple of 15.9 times our estimated CY10 earnings. Going forward, GSK Pharma intends to continue its focus on its 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. Besides launching ‘Carzec’ and ‘Arixtra’ in CY07 and the anti-cancer drug ‘Tykerb’ in CY08, the company has envisaged launching 3 more new drugs and 3 vaccines in the domestic market in CY09 and CY10. 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. We maintain our positive view on the stock.

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