GlaxoSmithkline: Pharma growth story

GlaxoSmithkline benefits from demand revival

MNC pharma companies were expected to be key beneficiaries of a revival of demand in the domestic pharma market, and as a result, GlaxoSmithkline Pharmaceuticals has reported an almost 16.5 per cent y-o-y growth in operating profit (including other income) to Rs 79.93 crore in the December 2005 quarter.

Senior company management in the post-result conference explained that an overwhelming proportion of other income comprised of income relating to clinical research work done for the global parent.

Other income for the company amounted to Rs 13.67 crore in the December quarter, a y-o-y growth of 64.5 per cent. The company's growth in operating profit was broadly in line with analysts forecasts. As a result, the stock slipped about 0.4 per cent to Rs 1380 on Monday.

The company's sales (excluding other income) grew almost 14.5 per cent y-o-y to Rs 323.42 crore in the last quarter. Company officials highlighted that there was an improvement in sales in existing product segments like antibiotics, dermatology and vaccines.

In addition, sales momentum was provided by new products licensed from overseas pharma companies, such as Rabeprazole (medication for treating ulcers of the stomach and duodenum).

However, the company had to also deal with staff costs rising 30.9 per cent y-o-y to Rs 40.22 crore in the last quarter.

In addition, cost of total materials consumed rose about 14.75 per cent y-o-y to Rs 133.73 crore and the management attributes it largely due to higher excise duty paid on formulations bought from third parties.

As a result, Glaxo's operating profit margin remained flat on a y-o-y basis at 23.7 per cent in the last quarter.

Going forward, the company is planning product launches in the asthma and vaccine segments (these would be done via in-house development, coupled with in-licensing agreement with other pharma companies) over the next few quarters.

The street appears to have factored in the growth opportunities for the company, with the stock trading at about 35.75 times estimated CY06 earnings.

Rising MF inflows

The Rs 8,380-crore collection in new fund offerings during January 2006 indicates that retail money is coming into the stock markets, as has been predicted by many experts.

Putting the numbers in perspective, the January mutual fund inflows have already crossed 38 per cent of the net inflows of 2005, and over 93 per cent of the net inflows of 2004.

With net outflow of Rs 754 crore in January from existing funds, these numbers also suggest that mutual fund investors prefer new fund offerings, rather than existing funds. Many of the new funds with a corpus of over Rs 2,000 appear quite large in size.

As the Sensex rules above the 10,000-point level, finding good investment ideas is difficult and the increasing size of individual funds makes the fund manager's job tougher.

Coming to retail investors, who may be investing in new funds as they have missed the bus so far, could reduce their risk by going for systematic investment plans.

Zee: Mixed signals

Zee Television's attempts at sprucing up its channels with better content and the launch of new channels have badly impacted its December quarter results.

The cost of new content and the start-up losses of Rs 59.7 crore for its new channels have resulted in the net profit falling 64 per cent y-o-y to Rs 31 crore in the December 2005 quarter, which includes a Rs 2 crore profit for transferring assets to Zee News. The topline growth has been fairly good though at 17 per cent y-o-y to Rs 377.7 crore in Q3 FY06.

Of this, advertising revenues are up a good 12 per cent y-o-y, subscription revenues are up 7.8 per cent, while revenues from other sales and services are up 264 per cent.

However, with programming and marketing costs up 59 per cent y-o-y, and marketing costs soaring by 70 per cent, the operating profit has dropped sharply to Rs 36.5 crore, a fall of 66.5 per cent.

In fact, total expenditure has climbed to 90.5 per cent of sales compared with 66 per cent of sales in Q3FY05. Thus, the operating profit margin has shrunk to 9.7 per cent in Q3 FY06 from 33.8 per cent in the December 2004 quarter.

Even if one considers the existing business, the operating profit has fallen because of the higher costs of content. With Zee planning to launch more channels expenses would continue to mount, and therefore it is unlikely that th new businesses will turn profitable for another year.

The stock has been a big underperformer in the last three years. Given that the company will soon face competition in the DTH space, costs are likely to put pressure on profitability. At Rs 171, the stock appears to be a trifle expensive as it trades at a P/E multiple of nearly 23 times FY07 earnings per share.

With contributions from Amriteshwar Mathur and Shobhana Subramanian