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GSK Pharma: Exceptional loss hits profits
Dec 27, 2012

GSK Pharma has announced its 3QCY12 results. The company has reported 10% YoY growth in sales and increase of 4.3% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 10% YoY during the quarter, its core pharmaceuticals business grows by 11% YoY.
  • Operating margins improve marginally by 0.8% due to decrease in other expenses.
  • Bottomline increases by 4.3% YoY during 3QCY12, due to exceptional loss (relating to rationalizing initiatives).

Financial performance: A snapshot
(Rs m) 3QCY11 3QCY12 Change 9mCY11 9mCY12 Change
Net sales 6,076 6,685 10.0% 17,720 19,432 9.7%
Operating Income 71 75 6.1% 263 245 -6.9%
Expenditure 4,315 4,696 8.8% 11,981 13,458 12.3%
Operating profit (EBDITA) 1,831 2,064 12.7% 6,002 6,219 3.6%
EBDITA margin (%) 30.1% 30.9% 0.7% 33.9% 32.0%  
Other income 371 403 8.7% 1,180 1,517 28.6%
Depreciation 49 48 -1.2% 143 133 -7.0%
Profit before tax 2,153 2,419 12.3% 7,039 7,604 8.0%
Exceptional gain/(loss) (2) (166)   (3,068) (1,185)  
Tax 692 731 5.6% 1,032 2,031 96.8%
Profit after tax/(loss) 1,460 1,523 4.3% 2,939 4,388 49.3%
Net profit margin (%) 24.0% 22.8%   16.6% 22.6%  
No. of shares (m)         847.0  
Diluted base earnings per share (Rs)         67.0  
Price to earnings ratio (x)*         31.6  
*based on trailing 12 months earnings

What has driven performance in 3QCY12?
  • Topline grew by 10% YoY during the quarter, led by the core pharmaceuticals business which grew by 11% YoY. However, this was lower than the industry rate of 13-14%.

  • Operating margins improved marginally by 0.8% due to decrease in other expenses (down 10% YoY). Margins would have been higher had it not been for the increase in raw material costs. These increased by 18%, with staff costs also increasing by 14% YoY.

  • Bottomline increased by 4.3% YoY during 3QCY12, due to exceptional loss of Rs 166 m, which related to rationalizing initiatives. Excluding these costs, the profit after tax increased by 16% in tandem with the growth in operating profits.

What to expect?
At the current price of Rs 2,115, the stock is trading at a multiple of 22.1 times our estimated CY14 earnings. GSK Pharma has a strong product pipeline and brand building ability as shown in the past. The company intends to steadily introduce more products and move towards high margin products. However, as company is highly exposed to the pricing policy, the recent pharma pricing policy announced is likely to impact its business. Secondly, its higher dependence on the acute segment and largely in anti-infective segment raises concern about its growth going forward. Further the current valuations do not leave much on the table for investors and we recommend a 'Sell' on the stock.

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