The Hindu Business Line : GlaxoSmithKline Pharma: Buy

FRESH buying may be considered in the Glaxo stock that trades at Rs 415. Business Line had earlier given a buy recommendation for the stock when it was trading at Rs 292 (refer edition dated March 16) and later at Rs 360 (refer edition dated June 8). Notwithstanding the sharp gain in price over the past few months, we reiterate our buy rating, as the company's prospects look encouraging.

The stock might not witness the kind of climb seen over the past few months; if at all such an appreciation does take place (of about 40 per cent from current levels), it is unlikely that it will be compressed over a three-four month time-frame.

Conservative investors, who had picked up the stock in Rs 280-290 range, can contemplate partial profit-booking to lock-in to the 50 per cent rise in the stock price.

Financials: The following are salient features of its performance for the quarter ending June 2003:

Net sales rose 6 per cent at Rs 324.9 crore. The pharma division, which contributes about 80 per cent of revenues, grew by about 8 per cent.

A focus on cutting costs has yielded results, with raw material costs constituting about 39 per cent of net sales for the quarter ending June 2003, compared to about 45 per cent on a year-on-year basis.

The reduction in raw material costs has also led to an expansion in margins at the operating level. Reckoned on a quarterly basis, margins have risen to 23 per cent from 19.2 per cent.

Net profit after tax has jumped 28 per cent for the quarter ended June 2003 at Rs 52.4 crore. Cash inflows for the June quarter were also bolstered by receipts from the sale of the company's property at Bangalore, which fetched Rs 12.2 crore.

For the half-year ended June 2003, the growth in topline was more muted at close to 3 per cent. This was largely due to the fall in offtake by members of trade due to the uncertainty surrounding the implementation of the value-added tax regime in March. Post-tax earnings for the same period, however, grew 31 per cent at Rs 87.5 crore.

Business prospects

The overall pharma market reported a rather sluggish growth rate of about 2.5 per cent in the 2003 first half. But Glaxo's pharma business grew about 5.6 per cent. Improvements in operating margins have been brought about by a focus on `power brands'.

The monsoon season is when a company such as Glaxo sees an increase in the offtake of its products. As people become more prone to infections during this season, it translates into better sales for Glaxo, which has a strong presence in the anti-infectives market with brands such as Augmentin and Zantac.

Glaxo's offerings are made up of products that address the treatment of infections, respiratory disorders, cough and cold, and dermatological problems. The absence of strong brands to treat lifestyle diseases such as diabetes, cardiovascular problems and disorders of the central nervous system is probably why topline growth continues to be muted. The lifestyle category is growing at a much faster clip compared to the traditional therapeutic areas such as anti-infectives and pain management.

The company proposes to bring in molecules of its parent to address the gap in the lifestyle segment. This should complete its product portfolio and complement its formidable strength in the anti-infectives/antibiotics space. With surplus cash at its disposal, domestic brand acquisitions are also a possibility.

The other positive development is the agreement entered into by Burroughs Wellcome with its employees for separation. This should clear the decks for the merger of Burroughs with Glaxo, though there has been co-ordination in areas such as marketing over the past few years. Glaxo and Burroughs have operated as a merged entity at the global level for close to three years now. With the completion of restructuring initiatives, the focus would now shift to addressing the needs of the marketplace better.

Stock outlook

At the current price, the Glaxo stock trades at a multiple of about 20 times its trailing four-quarter sustainable earnings per share. Glaxo traded at a price-earnings multiple of 22-25 times its earnings per share and was accorded a premium valuation over its MNC peers to account for its stature as a leader in the domestic market. Market prospects and developments on the restructuring front point to further upside potential in the stock.

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