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Nath Balakrishnan

EXPOSURES can be considered in the stock of GlaxoSmithKline Pharma at the current price of about Rs 600; the reiteration of our `buy' recommendation represents a continuation of the stance we have held on the stock since the time it was trading at the Rs 300 mark in the early part of 2003.

Though the stock has not moved up significantly since our earlier recommendation three months ago, we believe the stock has the potential to deliver meaningful returns over a one-year horizon.

A comparison of the latest quarterly numbers with those of the corresponding quarter of 2003 does not present a flattering picture. However, if one reckons the industry dynamics that prevailed in the second quarter of last year, a straight comparison may not be appropriate.

The reason: The period between April-June 2003 was an exceptionally good one for most pharma majors, as they were coming off a weak first quarter when sales was hit on account of the lack of clarity surrounding the imposition of value-added tax. Hence, topline growth in the latest quarter at four per cent has been dampened because of the effect of a high base.

To eliminate the effect of the skew so caused by the high-base effect, a comparison between the half-yearly performance in the current year with that of the corresponding previous period would present a more coherent picture. Such a comparison reveals a strong performance: Topline up by 10 per cent; operating profit by 27 per cent; and earnings by a robust 32 per cent (adjusted for exceptional items). Operating margins continue to display buoyancy, as Glaxo appears to be reaping the rewards of focussing on its key brands, apart from bring about a reduction in procurement costs.

While the possibility of a further improvement in margins from the current level cannot be ruled out, such gains would only be incremental in nature, given that they have scaled up significantly over the past six quarters.

The near-term impact from the transition to a product-patent regime that would be ushered in January 2005 might not be significant.

However, we do not believe Glaxo would bring in products from its parent's pipeline at an appropriate time. And given the nature of its sales force, it could emerge as a preferred partner of choice for foreign players looking to enter the Indian market when the patent regime turns more conducive.

Investors could also draw comfort from Glaxo's swelling cash position , which should be buttressed further with the proceeds from the sale of property at Worli. A substantial one-time dividend, or even the possibility of a buyback, cannot be ruled out.

At the current price, Glaxo trades at a price-earnings multiple of about 20 times its likely CY05 earnings. Historically, too, the company has commanded a valuation in the 22x-25x band.

Given its premier position in the domestic market and its parentage, we believe that such a valuation level is not unjustified. Buy with a one-year perspective.

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