GlaxoSmithKline: Profit may drop to five-year low

GlaxoSmithKline Consumer Nigeria may close the current year’s operations with a lower profit than seen any time since 2010. The pharmaceutical company lost profit margin last year and a much wider drop has happened this year. Sales revenue is slowing down and costs are growing well ahead of earnings, which has reduced profit margin to the lowest mark in many years.

Mr. Dayanand Sriram, the newManaging Director, has taken over the headship in what is turning out to be one of the company’s most challenging operating years. He needs innovative approaches to both drive sales volume and keep costs in check. He needs to consolidate on previous product introductions and look out for new products that can drive growth.

The company ended second quarter operations with a sales revenue of N15.67 billion, which is an increase of 11.9% over the corresponding figure in 2013. If the current growth rate is maintained, turnover is expected to come to N32.4 billion for GlaxoSmithKline Consumer Nigeria at the end of 2014. This will be an increase of 11% over the closing revenue figure last year and a slowdown from the annual growth of 15% in 2013. The company has maintained stable growth in sales revenue over the past five years, as new product launches have led to revenue base diversification and some gains in market share.

Against the growth in sales revenue, the company lost profit in the second quarter. After tax profit came to over N863 million at the end of June, which is a drop of 39.5% from the corresponding figure last year. Full year expectation indicates after tax profit in the region of N1.84 billion for GlaxoSmithKline Consumer Nigeria at the end of 2014. This will be a drop of 37% from the peak profit figure of N2.92 billion the company reported in 2013.

Growing revenue and falling profit is explained by rising costs. The company is spending considerably more to generate a naira of sales revenue. Cost of sales grew by 23.2% to N10.32 billion year-on-year in the second quarter, nearly twice as fast as sales revenue. That raised the proportion of sales revenue devoted to cost of sales from 59.8% in June last year and 60.2% at the end of the year to 65.8% at the end of the second quarter. Gross profit margin has therefore declined from 40.2% to 34.2% over the review period.

Selling and distribution expenses also grew well ahead of sales revenue at 33.6% compared to the 11.9% and equally claimed an increased share of sales revenue. The increases in cost of sales and selling/distribution expenses accounted for a drop of 42.2% drop in operating profit to N1.18 billion during the period. The company has the advantage of having insignificant interest expenses and is therefore operating at a net interest income position. Its balance sheet shows that it has no interest bearing obligations.

The emerging cost-income structure of the company has changed to the detriment of profit margin. Net profit margin has dropped from 10.2% in June 2013 to 5.5% this year, the lowest figure in many years. Inability to convert improving revenue into profit is the major operating weakness of GlaxoSmithKline Consumer Nigeria this year.

Major developments in the balance sheet over the first six months of the year include an increase of 14.7% in inventories to N6.40 billion, about 72% rise in trade and other receivables to N6.71 billion and a drop of 19.2% in cash and bank balances. Trade and other payables are also up by 32.4% to N14.28 billion at the end of the second quarter.

The company earned 90 kobo per share at the end of the second quarter, a drop from 149 kobo in the same period last year. Earnings per share is projected at 192 kobo for the company at the end of the year. That will be a drop from N3.05 it realised at the end of last year and the lowest earnings per share since 2010. The company has maintained dividend per share at N1.30 in the past two years.

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