Pharmaceutical company GlaxoSmithKline Pharmaceuticals Ltd is as defensive a stock as one can find. The company’s earnings have grown at an average rate of 11% in the past two years. While large domestic pharma companies are plagued by lawsuits and large forex exposures, Glaxo is focused on the Indian market and hence there few shocks one can expect in its results.
Thanks to the uncertainty in the markets, it’s understandable that investors are now willing to pay a high price for steady performers such as Glaxo. Still, its valuation of about 22 times trailing earnings is way too high, considering that earnings have been growing at half that rate. It’s not that earnings are expected to grow at a much higher rate—IIFL Cap, India Infoline’s institutional research division, estimates that earnings will grow at a compounded annual growth rate of just 9.4% between 2008 and 2011.
That translates into a price-earnings/growth (PEG) ratio of 2.34 times. Normally, a PEG of more than one is considered expensive. But Glaxo has enjoyed a high valuation for a long time now thanks to the predictability of its earnings. Besides, investors get added comfort from the cash balance of about Rs1,500 crore and strong recurring cash flow generation. Cash from operations after working capital changes amounted to 23% of sales in 2007 and there’s little reason to believe that the ratio would have dropped much in 2008. Profit margins improved last year, both at the operating level and due to higher yields on surplus cash. Other income contributed to 14% of profit, against about 11% in 2007.
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Glaxo launched some new products last year such as Tykerb in the field of oncology, as well as a drug for hypertension. It also launched a critical care anti-fungal, which should help it consolidate its position in the hospital space. According to IIFL, the product launches may not not result in any major acceleration in the company’s growth rates, but should help the company maintain current growth rates.
Graphics by Paras Jain / Mint
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