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GSK Pharma: Quite a good quarter - Views on News from Equitymaster
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GSK Pharma: Quite a good quarter
Dec 16, 2014

GSK Pharma has announced its 3QCY14 results. The company has reported a growth of 19.1% YoY and an increase of 27.5% YoY in the net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by 19.1% YoY, the core pharmaceuticals business grows by 20.4% YoY.
  • Operating margins also improve by 3.9% on the back of better gross margins and decline in operating expenses.
  • Despite the 45% YoY growth in operating profits, bottomline growth is lower at 27.5% YoY on account of lower other income and higher tax expenses.

(Rs m) 3QCY13 3QCY14 Change 9MCY13 9MCY14 Change
Net sales 6,205 7,390 19.1% 18,895 19,938 5.5%
Operating Income 61 78 27.3% 194 226 16.8%
Expenditure 5,126 5,818 13.5% 15,051 16,297 8.3%
Operating profit (EBDITA) 1,141 1,649 44.6% 4,038 3,868 -4.2%
EBDITA margin (%) 18.2% 22.1%   21.2% 19.2%  
Other income 394 357 -9.3% 1,532 1,204 -21.4%
Depreciation 50 55 10.7% 141 148 4.5%
Exceptional gain/(loss) (8) -   177 -  
Profit before tax 1,477 1,952 32.1% 5,606 4,924 -12.2%
Tax 468 665 42.2% 1,757 1,689 -3.8%
Profit after tax/(loss) 1,010 1,287 27.5% 3,850 3,235 -16.0%
Net profit margin (%) 16.3% 17.4%   20.4% 16.2%  
No. of shares (m)         847.0  
Diluted base earnings per share (Rs)         49.3  
Price to earnings ratio (x)*         50.2  
*based on trailing 12 months earnings

What has driven performance in 3QCY14?
  • Net sales increased by 19.1% YoY. Company generates large part of its revenues from core pharmaceuticals segment. The last few quarters were impacted by the new pricing policy. Many of the company's brands had come under pressure. While the growth in the current quarter looks impressive, one should also keep in mind the lower base of the 3QCY13, when the topline had declined by approximately 7% YoY.

  • Because of the pricing policy impact, the operating margins too remained under pressure during the previous quarters. However, the current quarter witnessed improvement due to decline in overall operating costs.

  • At the PBT level, the profits were up by 32.1% YoY. Net profit growth was lower at 27.5% YoY on the back of higher taxes.
What to expect?
At the current price of Rs 2,474, the stock is trading at a multiple of 35 times our estimated CY16 earnings. Increasing competition and higher dependence on the acute segment (especially anti-infective) raises concern about the company's growth going forward. Most importantly, valuations are expensive. We thus reiterate our SELL rating on the stock.

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