GSK Pharma's health gets boost from focus on top brands' yields

GSK Pharma’s June quarter results were broadly in line with estimates, as the firm reported revenue growth of 7 per cent over the year-ago period. Adjusted for the discontinued portfolio (smaller brands), growth stood at 12 per cent.

The company is focusing completely on promoting its top twenty brands, including the antibiotic Augmentin, and antipyretic Calpol. The company has expanded its distribution reach by 30 per cent, through incremental sales force additions in the targeted therapies.

Some changes carried out by the management has started bearing fruit. Most of the brands being promoted have recorded double-digit growth in the quarter. While revenue growth is in double digits, the company will look at improving volume growth, which came in at 8 per cent in the quarter.

In addition to the existing base, the company is also looking at new product launches to boost revenue and volume growth.

While these are positive signs, the Street is worried about revenue growth and margins, given the discontinuation of some brands and rise in costs on account of a new plant at Vemgal, Karnataka.

Analysts at B&K Securities, however, do not expect the plant to have a significant impact on margins. 

This is because products manufactured at this plant will initially be used to reduce dependence on third-party contract manufacturers, and hence the plant could achieve early break-even.

They also believe margins (currently at 21 per cent) could inch up as the acute season starts picking up, and contribution from lower revenue/margin brands starts reducing.

While the company has earlier faced multiple problems on account of supply-related issues, which hampered revenue growth, it has seen some turnaround over the past few quarters.

Despite the positives, analysts at IDFC Securities Research believe that valuations, at 39 times its FY21 earnings estimates, are at a substantial premium to peers such as Sanofi and Pfizer.

Further, they expect the upside for the stock to be capped at current levels, given limited near-term triggers. The Budget proposal to raise minimum pubic shareholding to 35 per cent, if implemented, could also impact the company.