Stock Review: GSK PHARMA

Growth in line with market and weakened margins on account of high costs are the major characteristics of the performance of the multi-national pharma company GSK Pharma during the latest quarter ended June 2011. The company posted a 13% growth in net sales and 8% growth in operating profit – its best performance in the past three quarters. Uptick in sales of oncology, dermatology and mass therapy drugs proved to be the major drivers of growth in revenues. The vaccine segment – one of the high-margin businesses of the company – posted growth of 14% in line with the market. The market growth has evidently slowed down – given the fact that this segment had posted a growth of 24% during calendar year 2010. Going ahead, the vaccines segment is likely to have a muted growth on account of high base effect.

The operating profit margin for the quarter dropped 150 bps. The margins were affected by high cost of raw materials and employees. Raw material, as a proportion of net sales, rose to 36.4% from a year ago level of 35%. Employee cost increased by 22% y-o-y. Both these cost heads grew significantly higher than the growth in net sales. Despite this, GSK has managed to maintain its margin at an annual level of 35% -- one of the highest in the industry.

The company, which sells branded generics as part of its strategy in India, launched four products during the June quarter. The company has benefited from the portfolio of cosmetic dermatology therapies from Stiefel Laboratories – Glaxo's global acquisition.
At a market cap of . 18,183 crore, the company is valued at almost nine times its net sales of past 12 months. These are premium valuations commanded primarily for the company's strong balance sheet, healthy product pipeline of its parent company and consistent growth. The company's stock is trading at 29 times its past four-quarter earnings after depreciating by 7% in last two months. These are fair valuations for a stable business model in the pharma sector.