GlaxoSmithKline Pharmaceuticals Equity Research

Date of Research – 27 January 2016

Price – Rs. 3192.00

About the Company

Established in the year 1924 in India, GlaxoSmithKline Pharmaceuticals Limited (“GSK Pharma” or the “Company“) operates in the healthcare and pharmaceuticals sector. The Company is a market leader in India with a turnover of Rs. 3,021 Cr. and a market share of 4.2%. GSK Pharma’s product portfolio includes prescription medicines and vaccines. The prescription medicine range includes therapeutics for anti-infectives, dermatology, gynaecology, diabetes, oncology, cardiovascular disease and respiratory diseases.

The Company is the market leader in most of the therapeutic categories in which it operates. GSK Pharma also offers a range of vaccines, for the prevention of hepatitis A, hepatitis B, influenzae, chickenpox, diphtheria, tetanus, rotavirus, cervical cancer, pneumonia and others. The Company has two manufacturing units in India, located at Nashik and Thane as well as a clinical development centre in Bangalore. The state of art plant at Nashik makes formulations while bulk drugs and the Active Pharmaceutical Ingredients (APIs) are manufactured at Thane.

In FY 2015, the Company changed its financial year from January – December to April – March. Accordingly, the financial statements are for the 15 months from January 01, 2014 to March 31, 2015, results are therefore not comparable.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2012FY 2013FY 2015FY 2016FY 2017
Total Income from Operations2,630.302,562.693,304.512,768.35 2,999.99 
Expenses1,811.162,034.462,671.53 2,289.47 2,581.00  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)819.14528.23632.98 478.88 418.99  
Depreciation17.8419.8825.35 24.78 26.35  
Finance Costs– – – 
Other income193.48176.95199.93 122.75 72.82  
Exceptional items148.22(26.15)51.88 (2.61) (45.73) 
PBT846.56711.45755.68 579.46 511.19  
Tax269.30229.78279.27 202.64 174.37  
Extraordinary items– – – 
PAT (before Minority Interest and share of Associates)577.26481.67476.41 376.82 336.82  

Profitability Analysis

ParticularsFY 2012FY 2013FY 2015FY 2016FY 2017
Operating Profit Margin Ratio33.2420.6119.16 17.30 13.97
Net Profit Margin Ratio17.7518.8014.42 13.61 11.23 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2011FY 2012FY 2013FY 2015FY 2016
Share Capital84.7084.7084.7084.70 84.70 
Reserves & Surplus1,851.001,922.131,905.031,744.28 1,611.37 
Net worth (shareholders funds)1,935.702,006.831,989.741,828.98 1,696.07 
Long term borrowings4.594.143.612.63 1.60 
Current liabilities859.59836.40888.911,106.55 1,057.52 
Other long term liabilities and provisions229.82241.03247.27277.51 290.83 
Total Liabilities3,029.713,088.403,129.523,215.67 3,046.01 


Application of Funds / Assets(Rs. Cr)
ParticularsFY 2011FY 2012FY 2013FY 2015FY 2016
Fixed Assets115.34133.2104161.95238.30 471.73 
Noncurrent Investments54.9810.060.060.06 0.06 
Current assets2,762.072,841.222,623.942,586.98 2,172.10 
Long term advances and other noncurrent assets35.6817.19251.29307.22 313.34 
Deferred Tax Assets61.6486.7292.2983.1088.79 
Total assets3,029.713,088.403,129.523,215.67 3,046.01 

Efficiency Analysis

ParticularsFY 2011FY 2012FY 2013FY 2015FY 2016
ROCE41.3640.7326.5034.61  28.21 
ROE / RONW22.1428.7624.2126.05  22.22 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

ParticularsFY 2012FY 2013FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)2,630.302,562.693,304.51 2,768.35 2,999.99 
Growth (%)8.94 %(2.57 %)29.85 % (16.23 %) 8.37 % 
PAT (Rs. Cr.)577.26481.67476.41 376.82 336.82  
Growth (%)34.69 %(16.56 %)(1.09 %) (20.90 %) (10.62 %) 
Earnings Per Share – Basic (Rs. )50.6056.9056.20 44.50 39.80
Earning Per Share – Diluted (Rs. )50.6056.9056.20 44.50 39.80 
Price to Earnings45.2752.5960.55 85.41 61.20 

Dividend History

The Company has maintained an average dividend yield of 2.00 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. GSK Pharma’s average current ratio over the last 5 financial years has been 3.19 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

GSK Pharma’s average long term debt to equity ratio over the last 5 financial years has been 0.00 which indicate that the Company is operating with close to zero level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Since GSK Pharma’s operates with zero level of debt, this ratio is not applicable in this case.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, GSK Pharma reported a promoter holding of 75.00 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 11.59 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.