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GSK Pharma: Benefits of 'prior'itizing - Views on News from Equitymaster

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GSK Pharma: Benefits of 'prior'itizing

Nov 16, 2009

Performance summary
  • Revenues grow by 13% YoY during 3QCY09 led by the company’s priority products.
  • EBDITA margins remain stable at 37.7% during the quarter.
  • Bottomline grows by 7% YoY and is lower than the growth in operating profits due to lower other income.

Financial performance: A snapshot
(Rs m) 3QCY08 3QCY09 Change 9mCY08 9mCY09 Change
Net sales 4,607 5,183 12.5% 13,058 14,412 10.4%
Expenditure 2,873 3,230 12.4% 8,190 9,101 11.1%
Operating profit (EBDITA) 1,734 1,953 12.6% 4,868 5,311 9.1%
EBDITA margin (%) 37.6% 37.7%   37.3% 36.9%  
Other income 253 168 -33.5% 679 804 18.5%
Depreciation 40 40 -0.3% 116 116 0.1%
Profit before tax 1,947 2,081 6.9% 5,430 5,999 10.5%
Tax 648 671 3.6% 1,838 2,018 9.8%
Exceptional item 20 -   89 105 18.3%
Profit after tax/(loss) 1,320 1,411 6.9% 3,681 4,087 11.0%
Net profit margin (%) 28.6% 27.2%   28.2% 28.4%  
No. of shares (m)       84.7 84.7  
Diluted earnings per share (Rs)**         56.7  
Price to earnings ratio (x)*         29.4  
(* on a trailing 12-month basis)  (** excluding extraordinary items)

What has driven performance in 3QCY09?
  • GSK Pharma’s topline during the quarter grew by 13% YoY. This could be attributed to the active promotion of priority products including vaccines (accounting for one third of revenues), which registered a double-digit growth. New product launches made last year could also have played a role in contributing to revenue growth. For the nine month period, sales registered a 10% YoY growth.

  • Operating margins remained stable at 37.7% during the quarter. A fall in raw material costs (as percentage of sales) was offset by a rise in staff costs and other expenditure. For the nine month period, however, operating margins shrank by 0.4%. 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.

  • The bottomline registered a growth of 7% YoY during 3QCY09 and was lower than the 13% YoY growth in operating profits as the other income fell by 34% YoY. For the nine month period, net profits grew by 11% YoY on the back of 9% YoY growth in operating profits.

What to expect?
At the current price of Rs 1,665, the stock is trading at a multiple of 24.2 times our estimated CY11 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. While the company launched 'Carzec' and ‘Arixtra’ in CY07 and the anti-cancer drug ‘Tykerb’ in CY08, it 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. Having said that, the stock has gained in the last three months and valuations at the current levels appear stretched.

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