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Nath Balakrishnan

Mr S. Kalyanasundaram, Managing Director... Momentum at the operational level continues.

INVESTORS with a long-term perspective can contemplate exposures in the GlaxoSmithKline Pharma stock, which trades at about Rs 495.

Business Line had recommended `Buy' on the stock several times, the most recent being when it was trading at about Rs 410.

A buy rating on the stock is reiterated on the basis of strong momentum at the operational level, benefits that would accrue post completion of the legal merger with Burroughs Wellcome, and traction in product launches through tie-ups/in-licensing arrangements, as Glaxo makes the transition to the new patent regime in little more than a year from now.

Like other stocks of its kind, Glaxo too has witnessed an upswing in its price over the past six months, in line with the rally covering pharma stocks.

It is unlikely that the appreciation in price would be as significant as in the past, when one considers that the current price captures, to a large extent, the benefits that Glaxo has derived from its restructuring efforts.

Further gains from restructuring would only be incremental; price appreciation from the current level is more likely to be steady, rather than spectacular. However, the merger with Burroughs could be a key valuation trigger.

Business performance

The performance of Glaxo's power brands — a set of 30 brands that the company focusses on sharply — continues to be encouraging.

These brands fall outside the ambit of price control; therefore, realisations from them are also comparatively higher.

Glaxo has constantly sought to reduce its dependence on price-controlled brands; the extent of the cover has fallen from about 60 per cent of sales at one point to about 35 per cent now.

The brands now generate more than one-third of the company's revenues.

To widen the basket of offerings, Glaxo is also leveraging its strong domestic franchise and its distribution network by entering into co-marketing agreements/in-licensing deals with other companies.

Existing arrangements include one with Novartis (for the anti-fungal Terbinfina) and with Ranbaxy (for Cipro-OD).

Such arrangements confer on Glaxo the ability to launch products in therapeutic segments in which it does not have a strong presence; typically, the growth rates in such segments would also be higher than that of the overall market.

Glaxo has a dominant presence in the anti-infective category, which is a mature therapeutic segment characterised by a high degree of price competition.

Even in this segment, Glaxo's brands such as Augmentin and Calpol (a paracetamol that is part of Burroughs' basket) continue to post robust growth rates.

Merger with Burroughs

Though the operational merger is complete, it is yet to be formalised legally. Once the latter happens, Glaxo would also benefit from the strength in Burroughs' performance.

For the just-concluded quarter, Burroughs reported a strong growth in post-tax profit (in excess of 40 per cent).

Additionally, the merger would pave the way for the disposal of Burroughs' plant at Mulund in Mumbai. (Glaxo is also negotiating to dispose off the property that it owns at Worli, Mumbai).

Cash flows from the disposal of these properties can be sizeable; this infusion could also translate into a substantial one-time dividend for shareholders, if Glaxo's past record is any indication.

Valuation

At the current price, the Glaxo stock trades at a price-earnings multiple of about 22 times its trailing four-quarter earnings per share.

It has historically enjoyed valuation in the 24-26 times band, to reflect its stature as one of the leading players in the domestic market. It continues to be one of the superior MNC pharma plays in the country today. Coupled with the initiatives that would pay dividends in the long-term, the stock could merit a look even at these levels.

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