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Sunday, November 16, 2008

GSK Pharma - Dividend Income - Steady Growth

Investors interested in steady capital returns and consistent dividend income should accumulate GSK Pharma’s stock.
Compared to a 53% fall in the Sensex, GSK’s stock has logged a price appreciation of 3%. This makes it an attractive defensive bet for investors in the current uncertain times.



GSK Pharma
Beta: 0.32
Institutional Holding: 40.7%
Dividend Yield: 3.4%
P/E: 20.2
M-Cap: Rs 9,062.9 cr
CMP: Rs 1,070

BUSINESS:
GSK Pharma, the Indian subsidiary of US-based innovator major GlaxoSmithKline Worldwide, functions like an Indian generic player for all practical purposes. This is the company’s biggest strength. While Indian subsidiaries of most global innovator companies have restricted themselves to selling their parents’ patented products, GSK has ventured into branded authorised generics and in-licensing of products. It also differs from its MNC peers in its growth plans. Unlike its peers, which are beefing up their product portfolio in high-margin chronic therapeutic areas, 90% of GSK’s product portfolio comprises acute therapeutic areas, which are under price control.

The company’s bias towards mass-market products, strong brand equity and a rich product pipeline have helped it to become one of the top three players in the domestic pharma market. GSK has been in a transformation phase since the past couple of years. It divested two of its non-core businesses — animal healthcare and fine chemicals — in ’06 and ’07, respectively. The company has recently re-organised its business units to focus on three major areas of mass-market products, vaccines and chronic therapy products.

GROWTH STRATEGY:
The company plans to tap growth in acute therapeutic segments at lower levels of the pyramid as well as semiurban areas and small towns. It also intends to grow its chronic therapeutic product portfolio, primarily supplemented by in-licensing products from other companies.
It is also de-risking its business by reducing emphasis on pricecontrolled products and focusing on priority products, which are nonregulated products outside price control. In ’00-01, price-controlled products constituted 40% of GSK’s product portfolio. This figure has now come down to 27%. The company is also bullish on its vaccines business, which currently contributes 11-12% to its topline. GSK is present in all types of vaccines, and this business segment is growing at 15% p.a. Riding on its reputation, the company is focusing on hospitals to tap institutional business. It is also looking at in-licensing seriously to enrich its product pipeline. Currently, revenues from in-licensing account for just 2-3% of the company’s total revenues. GSK plans to increase this to 5-6% in 2-3 years.

FINANCIALS:
GSK is conservative in its finances and has been debt-free. It has also been consistently rewarding its shareholders with high dividends. In the past five years, its dividend payment per share has jumped by over five times to Rs 36 per share in CY07, against Rs 7 per share in CY02. Sales have seen a CAGR of 8.2% over the five-year period ended December ’07 to Rs 1,602.2 crore. Net profit (adjusted for extraordinary items) posted a CAGR of 23.5% to Rs 365.2 crore during this period. GSK has been steadily increasing its operating profit margin (OPM) over the past five years; its OPM for CY08 was 31% — much higher than that of most domestic pharma companies.

CONCERNS:
While GSK has been aggressive in maintaining a healthy growth in its bottomline, its topline growth has suffered. The company expects to use the excess cash on its books for possible brand acquisitions, buyback schemes and paying special dividends. But GSK has made no brand acquisitions since 1999. The company is more interested in distributing its funds in the form of dividends, rather than pumping them back into the business.

VALUATIONS:
Unlike other MNC pharma companies, GSK is one of the most premium stocks in its segment. It is trading at over 20 times its trailing earnings — much less than that of fast-growing domestic peers like Cipla and Sun Pharma. The company expects to break into double-digit revenue growth by CY10. Assuming that GSK maintains its growth in sales and profits, its valuations will be fairly comparable with that of its peers. GSK is a classic case of a defensive stock. Investors interested in steady capital returns, along with consistent dividend income, should accumulate the stock at its current price.

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