Weak financials, impairment charge ail GSK Pharma; stock falls over 12%

Topics GSK Pharma

An impairment charge and weak financial performance led to an over 12 per cent fall in the GSK Pharmaceuticals stock on Tuesday.

In addition, the company — as part of its strategic review — is looking at options including sale of its Vemgal facility in Karnataka.

The financial impairment was on account of a global voluntary recall of ranitidine (antacid) products, which include its top brand Zinetac in India. 

The move was prompted by the detection of a carcinogen in the drug, with the firm indicating it would continue its probe into the potential source of the carcinogen. 

It reported a Rs 660-crore loss in the quarter because of a one-time financial impact of Rs 750 crore. This pertained to a Rs 640-crore financial impairment on account of under-utilisation of manufacturing facilities, Rs 97 crore of impairment of other assets and costs, and Rs 17 crore on account of litigation.

The decision to sell the Vemgal facility, built at a cost of Rs 1,000 crore, came as a surprise. Capex on the facility, with the capacity to manufacture 8 billion tablets and 1 billion capsules, had been weighing on its cash flows over the last few years. With production from the plant expected to begin in the March quarter, return ratios were expected to improve. 

However, the recall of Zinetac, which would have accounted for 60 per cent of production, led to the sale decision. If this goes through, it will be the second major sale in the last one year after the sale of a land parcel in Thane for Rs 550 crore.

The recall of Zinetac and portfolio optimisation led to a 6 per cent fall in reported revenues. However, even after adjustments for one-offs, sales growth in the quarter stood at just 6 per cent. 

Barring top brands, most other portfolio products are underperforming, leading to muted sales performance. 

Its operating profit margin, which was up marginally to 16 per cent, was affected by a steep 620-basis-point jump in employee costs. Higher staff costs wiped off all gains on account of a better product mix and other expenditure.

Despite the sharp fall in the share price, it is trading at 41x its FY21 earnings estimates. Over 80 per cent of analysts covering have a “sell” rating on the stock. Given the uncertainty on Vemgal as well as inconsistency in growth, investors may avoid the stock for the time being.

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