Glaxo: Hold/Avoid Fresh Exposures

Recommendation: Hold/Avoid Fresh Exposures

Sanjiv Shankaran

Boosted by sales of tailend brands, Glaxo India's net profit grew 34 per cent over the first nine months of this financial year (January-December).

A look at the fineprint, however, showed that, excluding the impact of the sale of tailend brands, Glaxo's performance during the first nine months was modest.

The positive effect of the overhaul of the marketing structure last year is yet to pay-off, a factor that may have acted as a damper on the stock movement over the last few months.

Glaxo's net sales, in the first nine months of this year, grew 9.79 per cent over the corresponding previous period to touch Rs 706 crore. After a strong showing in the earlier part of this year, Glaxo's sales were affected in the third quarter by a combination of trade boycott in some of the southern States and reduced purchases by trade in others.

Glaxo attributed the reduced offtake by trade to the outcome of changes in sales tax. Offtake at the secondary level (by medicine buyers) was in line with the industry growth. The extensive, and extensively covered, marketing overhaul undertaken last year was meant to get more out of strong brands in Glaxo's portfolio. In a retail market marked by stiff competition, the results of the overhaul may take longer to show. But the sales growth will play a significant role in Glaxo's valuation.

Glaxo's operating profit for the first nine months was Rs 108 crore, up Rs 22 crore (25.58 per cent) compared to the corresponding previous period. Once again, with the proceeds from brand sales removed, the rise in operating profit was a mere 7 per cent. The net profit for the first nine months was Rs 59 crore, up Rs 15 crore (34.09 per cent) compared to the corresponding previous period.

The annualised earnings per share (EPS) is Rs 13.2, leading to a price earnings multiple (PEM) of about 34 at the current share price of Rs 450. At the current level, shareholders may stay invested, avoiding fresh exposure. The downside risk from the current level seems limited, but higher valuation in the near-term is likely to hinge on the company improving its position in the domestic market. Till tangible developments on that front materialise, capital appreciation may be limited.