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GSK: OPM expansion continues

Nov 5, 2002

MNC pharma major, Glaxo's September quarter numbers appear staid in terms of topline growth. Sales growth at 5% pales in comparision to the 20% growth witnessed in June quarter. Overall, the company finished the first nine months of FY03 with an 11.5% topline growth. The sharp rise in topline in the previous quarter was on account of de-stocking exercise initiated by the company last year and hence was not sustainable. Higher other income and sharp rise in margins saw Glaxo (GSK) finish the quarter with nearly 55% bottomline growth.

(Rs m)3QFY023QFY03Change9mFY029mFY03Change
Sales 2,835 2,974 4.9% 7,480 8,340 11.5%
Other Income (includes net interest) 89 142 59.9% 294 282 -4.0%
Expenditure 2,475 2,435 -1.7% 6,702 6,812 1.6%
Operating Profit (EBDIT) 360 539 49.9% 778 1,528 96.3%
Operating Profit Margin (%)12.7%18.1% 10.4%18.3% 
Depreciation 53 55 3.8% 148 149 0.5%
Profit before Tax 396 626 58.3% 924 1,661 79.8%
Extraordinary items (54) (21)- 214 (53)
Tax 100 232 131.6% 294 602 105.1%
Profit after Tax/(Loss) 242 374 54.8% 844 1,006 19.2%
Net profit margin (%)8.5%12.6% 11.3%12.1% 
No. of Shares (eoy) (m) 74.5 74.5   74.5 74.5  
Diluted Earnings per share* 13.0 20.1   15.1 18.0  
P/E (at current price) 16.4  18.3 
(*- annualised)      

The sharp expansion in operating margins continued in 3QFY03. The rise in operating margins is due to combination of restructuring benefits, reduction in employee costs and focus on high margin products. In a conscious decision, GSK discontinued its rural operations and hived off several tail end brands. A better product mix and a price rise in some of its key brands helped the company in recording a substantial rise in operating profits. The results indicate that the restructuring efforts of the company are yielding results. Improved resource allocations of marketing spend, tight control on expenses and synergies from integration and reduction in staff numbers due to manufacturing rationalisation, coupled with control on the field staff and back office headcount have helped improve profits. GSK's management had earlier indicated that the company intends to double its operating margins over a three year period.

The new DPCO policy of the government is expected to be announced soon and GSK is likely to be a major beneficiary of the same. While big brands such as Zinetac, Zevit and Cobadex may come out of the DPCO net, Cephalasporin brand, Ceftum is expected to come under the DPCO net. Net net, drugs representing around 6% of the company's total turnover are expected to come out of DPCO coverage. The following table gives a snapshot of expected impact of the new DPCO policy.

Drugs coming out of DPCOTurnover (Rs m)
Zinetac611
Cobadex Forte294
Zevit204
Total Drugs coming out of DPCO 1,109
Less: Drugs coming under DPCO 
Ceftum405
Net Expected Effect of DPCO 704
% of sales Turnover5.8%

The merger with SmithKline is already showing considerable operational cost savings. The cumulative cost savings are estimated to be in the range of Rs 470 m in the current year. The primary areas for cost savings would be bulk sourcing of raw materials, reduction in staff costs and shift from high cost manufacturing centers. The merger effect coupled with Glaxo’s focus on strategic brands is expected to result in operating margins improvement. GSK's margins have already registered a marked upturn in the last couple of quarters. We expect margins to stabilise at around 17-18%.

Till further clarity emerges on the exact impact of the DPCO, we maintain our FY03E EPS estimate of Rs 19.8. At the current market price of Rs 330, the stock trades at 16.7x FY03E earnings.

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