• FEBRUARY 19, 2004

Glaxo: Power brand strategy pays off

GlaxoSmithKline Pharmaceuticals (Glaxo) recently announced its quarter and year ending FY04 results. For 4QFY04, while the topline grew by 8% YoY, the company did well to turn out profits after the losses that it had incurred in the same period of FY03. The profit growth for FY04 was better still at 76% YoY. This came on back of the company improving upon its revenues by 4% for this period. This growth in topline compbined with reduction on the expenditure front helped Glaxo to improve its operating margins for FY04 by 570 basis points. The improvement on the margins front was much better at 1,040 basis points for the fourth quarter.

Financial performance: A snapshot
(Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
Sales 2,290 2,466 7.7% 11,482 11,917 3.8%
Other Income 145 161 10.8% 427 544 27.3%
Expenditure 2,104 2,010 -4.5% 9,751 9,436 -3.2%
Operating Profit (EBDIT) 186 456 145.7% 1,731 2,481 43.3%
Operating Profit Margin (%) 8.1% 18.5% - 15.1% 20.8% -
Interest 0 0 - 0 0 -
Depreciation 46 49 7.0% 195 179 -7.9%
Profit before Tax 285 568 99.3% 1,963 2,846 44.9%
Extraordinary items (251) (219) - (304) (96) -
Tax 68 202 196.5% 679 1,027 51.3%
Profit after Tax/(Loss) (35) 146   981 1,722 75.6%
Net profit margin (%) -1.5% 5.9%   8.5% 14.5%  
No. of Shares 74.7 74.7   74.7 74.7  
Diluted Earnings per share* (Rs) -1.9 7.8   13.1 23.1  
P/E Ratio (x)         27.2  
(* annualised)            

The growth in topline for FY04 was a result of the company's pharmaceuticals business growing by 6% YoY. The growth in this business, which constitutes to around 82% of Glaxo's total revenues, negated the 5% decline in revenues from the company's other businesses segment (18% of revenues). This segment caters to areas like veterinary formulations, feed supplements, diagnostics and lab equipments. Growth of the pharmaceuticals segment was driven basically by the 30 priority products (including brands like Augmentin) of the company that registered double-digit growth. Another growth driver from the pharma business was the company's vaccines range where the company rolled out a concept of 'Famili Vaccines' an immunisation awareness initiative.

Segmental performance
(Rs m) FY03 FY04 Change
Revenue 9,401 9,970 6.1%
PBIT 1,620 2,373 46.5%
PBIT margins 17.2% 23.8%  
Other businesses
Revenue 2,388 2,262 -5.3%
PBIT 394 445 12.9%
PBIT margins 16.5% 19.7%  
Revenue 11,789 12,232 3.8%
PBIT 2,013 2,818 39.9%
PBIT margins 17.1% 23.0%  
* Excluding inter-segment adjustments

On the profitability front, Glaxo has been able to improve its operating margins by substantial measures. And this is mainly a result of decline on the material consumed and other expenses fronts. While the former declined (as a percentage of sales) by around 2%, the drop in the latter was larger at around 8%. Based on segments, while PBIT margins for the pharmaceuticals segment improved by 660 basis points, the improvement in margins for Glaxo's other businesses was a substantial 320 basis points. The company's stated strategy of focusing on 30 power brands (reminds one of HLL) seems to be bearing fruit and driving profitability.

Cost break-up
(Rs m) FY03 FY04 Change
Materials consumed 5,031 4,943 -1.7%
% Of sales 43.8% 41.5%  
Staff costs 1,313 1,301 -0.9%
% Of sales 11.4% 10.9%  
Excise duty 1,010 985 -2.4%
% Of sales 8.8% 8.3%  
Other expenses 2,497 2,307 -7.6%
% Of sales 21.7% 19.4%  
Total expenses* 9,851 9,536 -3.2%
% Of sales 85.8% 80.0%  
* Excluding recovery of expenses

The improvement in Glaxo's FY04 margins would have been better but for the fact that the National Pharmaceuticals Pricing Authority (NPPA) revised downwards the prices of Ranitidine formulations in the third quarter (ending September 2003). This affected the margins of Zinetac, one of the important products of Glaxo.

At the current price of Rs 627, the stock is trading at a P/E multiple of 27.2x its FY04 earnings. The company has declared a dividend of Rs 10 per equity share for FY04 (Rs 7 in FY03). The company is in advanced stages of negotiations for its Worli property in Mumbai, which is expected to give its extraordinary income a fillip in FY05. Glaxo is gearing itself towards 2005, when the patent regime comes into force. The company is also likely to finalise the much awaited merger with Burroughs Wellcome soon. Though the valuations seem at the upper end of the spectrum, future benefits during the patent regime post 2005 is keeping the investor interest alive.

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