Financial statement analysis is an
evaluative method of determining the past, current and projected performance of
a company. Techniques are commonly used as part of financial statement analysis
like ratio analysis, DuPont analysis, cash flow analysis, leverage analysis,
disclosure practice review etc.
The report includes the process of
reviewing and evaluating GlaxoSmithKline’s financial statements (Such as the
Balance Sheet or Income Statement), thereby gaining an understanding of the
financial health of the company and enabling more effective decision making.
In this first part, I have made a
thorough review of financial performance of GlaxoSmithKline Bangladesh Ltd,
about the company, product it manufactures, structure of the pharmaceuticals
industry, GSK’s market share, its financing and dividend policy, Marketing and
distribution mechanism, SWOT analysis and industry analysis
In the next section, I calculate several ratios of
GSK. Ratios are also calculates for its industry benchmark, Square and for the
whole industry where I have taken sample of 5 companies as the industry.
Comparison is made between GSK and its industry benchmark and between GSK
industry average.
In the next section, I have decomposed ROE and done DuPont
analysis. Then sensitivity analysis is done to identify the crucial factor
which affects ROE most. I found that ROE of GSK is most sensitive with respect
to Net profit margin.
Then I have calculated potential red flags of the
company. There are at least five red flags in the company. Then quality of
earning is determined which indicates that the quality of earning of GSK is
quite good. Most of the earning is composed of cash.
Analysis of cash flow is made in the subsequent
section. The company is a cash cow company according to OCF & FCF. Cash
flow trend is shown in graph. The company’s sustainable growth rate is
calculated and a comparison is made with actual growth rate. GSK’s actual
growth exceeds sustainable growth. Then the company’s operating and financial
leverage has been calculated. Operating leverage is negative for last two years
but financial leverage is positive for all the four years.
The company’s disclosure practice is analyzed next.
The company abides by all the rule and regulations regarding disclosure. The
quality of voluntary is also satisfactory. The company has two off balance
sheet items, Operating lease & contingent liabilities.
In the next section, Valuation of this company is
done. As the calculation is done in excel; only three calculation is given in
the report. The intrinsic value of GSK is 663.83 taka. But the market price of
GSK’s share at December 31, 2012 was 570. This indicates that the share price
of GSK is undervalued. Then relative valuation is done with respect to other
four companies- Square, Reneta, Ibn Sina and Ambee pharma. The average relative
value of the company is 786 taka which also indicates that share price of GSK
is undervalued.
In the last section the company is classified
according to Boston consulting group (BCG) matrix. According to this matrix,
this company is classified as …..Then some recommendations are given to improve
the market position of GSK.
Table of Content
SL No
|
Name
|
Page No
|
01
|
Introduction
a.
Description of GSK
7-8
b.
Market structure
8-9
c.
Market share
9-10
d.
Financing & dividend policy 10-12
e.
SWOT analysis
12-14
f.
Industry analysis
|
7-22
|
02
|
Ratio analysis
14-17
|
|
03
|
DuPont analysis
17-22
|
|
04
|
Red flags & earning quality
a.
Red flags
23
b.
Earnings quality
24
|
|
05
|
Analysis of cash flow
a.
Computation of FCF and Classification 25
b.
Cash flow trend 27
|
|
06
|
Analysis of sustainable growth and value
addition
b.
Value addition
28-29
|
|
07
|
Operating and Financial Leverage
|
|
08
|
a.
Disclosure Practice,
29-31
b.
Discussion on MDA
31-32
c.
Accounting Policy 32-33
d.
Off balance sheet financing 34
|
|
09
|
Economic characteristics and strategies
|
|
10
|
Absolute and relative Valuation 35
a.
Pro forma income statement 36
b.
Pro forma balance sheet 37
c.
Free cash flow calculation 38
d.
Relative valuation
38
|
|
11
|
Policy Implication
39
|
|
12
|
Conclusion 40
|
|
13
|
Appendix
41-43
|
Introduction
GlaxoSmithKline
GlaxoSmithKline (GSK) is a world’s leading
research-based pharmaceutical company with a powerful combination of skills and
resources that provides a platform for delivering strong growth in today’s
rapidly changing healthcare environment.
GSK has leadership in four major therapeutic areas-
anti invectives, central nervous system (CNS) and respiratory & gastro-
intestinal/ metabolic. In addition it is a leader in the important areas of
vaccines and has growing portfolio of oncology products. GSK supplies products
to 140 global markets and has over 100,000 employees worldwide. GSK has 180
manufacturing site in 41 countries.
GlaxoSmithKline
Bangladesh Limited
GlaxoSmithKline Bangladesh Limited is a subsidiary of
GlaxoSmithKline Plc; world’s leading research based pharmaceutical company. One
of its strong strength is its powerful combination of skills and resources that
provides a platform to deliver fastest growth in today’s rapidly changing
healthcare environment. The principle activities of the company are
manufacturing and marketing of pharmaceutical, vaccines and healthcare
products.
GlaxoSmithKline conducts the operational activities in
Bangladesh as a principal with its own set-up of manufacturing, marketing and
distribution. The company has started business in Bangladesh in 1969 at
Chittagong by importing products from group company. GlaxoSmithKline
Bangladesh Limited (the Company) was incorporated on 25 February 1974 as a
public limited Company and is listed with Dhaka Stock Exchange Limited. The
Company is a subsidiary of Setfirst Limited, UK, which is 100% owned by
GlaxoSmithKline Plc, UK.
The global corporate mergers and acquisitions has seen the
evolution of the Company’s identity in the past 6 decades. In line with mergers
and acquisitions the identity changed from Glaxo to Glaxo Wellcome Bangladesh
Limited following the Burroughs Wellcome acquisition in 1995 and finally
to GlaxoSmithKline Bangladesh Limited during 2002 after merger with
SmithKlineBeecham in December 2000. The mega merger of the Company enables it
to deliver cutting edge advancements in health care solutions.
GSK
Bangladesh leads with a dominant position in the Vaccines market in the
country. The introduction of pneumococcal vaccine SynflorixTM , Flu Vaccine
FluarixTM along with CervarixTM the revolutionary cervical cancer vaccine for
women, the six in one vaccine-InfanrixTM Hexa for the infants, etc have further
enriched the vaccine portfolio. We now have the biggest vaccine portfolio in
the country with 12 vaccine brands.
Basic Information:
|
|
Authorized
Capital in BDT* (mn)
|
200.0
|
Paid-up
Capital in BDT* (mn)
|
120.0
|
Face
Value
|
10.0
|
Total
no. of SecuritiesTotal no. of Securities
|
12046449
|
52
Week's Range
|
560
- 1315
|
Market
Lot
|
50
|
Business
Segment
|
Pharmaceuticals & Chemicals
|
\
Product line of GSK,
Bangladesh, Limited
GlaxoSmithKline operates principally in two industry segments:
1. Pharmaceuticals: prescriptions, medicine and vaccines.
2. Consumer HealthCare: Over the counter medicines, Oral care and nutritional
healthcare products.
Product overview:
v Pharmaceuticals:
GSK’s board pharmaceuticals product line
includes antibiotic, antidepressant, gastrointestinal, dermatological,
respiration, cancer and cardiovascular medications. GSK has a variety of
vaccine products, including hepatitis A and B, diphtheria, tetanus, whooping
cough and influenza.
v Consumer Healthcare:
GSK Consumer Health
brings oral health care, over the counter medicines and nutritional health care
products to millions of people.
GlaxoSmithKline Products Glossary
|
|
Local production
Imported product
|
60 products including
Berin
Cytamen
Kefdrin
Pentamox
17 products including
Alkeran
Seretide
Zinnat
|
Vaccines
Consumer Healthcare
|
17 products including
Engerix-B
Fluarix
Synflorix
9 products including
Horlicks
Chocolate Horlicks
Junior horlicks
Mother Horlicks
Horlicks Lite
Boost
Maltova
Glaxose
|
Industry structure:
The pharmaceutical industry in
Bangladesh is one of the most developed hi-tech sectors within the country's
economy. After the promulgation of Drug Control Ordinance in 1982, the local
pharmaceuticals companies of our country get rapid support for growth and
development of this sector was accelerated however, from then MNC’s are lag
behind. There are now about 231 companies in this sector and the approximate
total market size is about Taka 76,500 million per year. Bangladesh
Pharmaceutical Industry is now heading towards self-sufficiency in meeting the
local demand. The industry is the second highest contributor to the national
exchequer after garments, and it is the largest white-collar intensive
employment sector of the country.
There are about 450 generics registered in Bangladesh. Out of
these 450 generics, 117 are in the controlled category i.e. in the essential
drug list. The remaining 333 generics are in the decontrolled category, the
total number of brands /items that are registered in Bangladesh is currently
estimated to be 5,300, while the total number of dosage forms and strengths are
8,300. Bangladesh pharmaceutical industry is mainly dominated by domestic
manufacturers. Of the total pharmaceutical market of Bangladesh, the local
companies are enjoying a market share reaching around 80%, while the MNCs are
having a market share of 20%.
The growth of the country’s domestic pharmaceutical market to
the tune of $1.13 billion in terms of value, as it stands now, is quite a
positive development. Such a development has occurred because of decreasing
dependence on imported drugs. Currently about 97% of the total requirement of
medicines is created by the local companies and the rest 3% is imported.
The imported drugs
mainly comprise of the cancer drugs, vaccines for viral diseases, hormones etc.
Its value-wise growth, recorded at 23.59% in 2011 over that of 2010 points to
the fact that many of the pharmaceutical companies have not only successfully
replaced the imported medicines in quality and quantity, but also reached a
point where they could be able to capture markets abroad if only the policy
regime is favorable enough.
Market share:
The top 12 leading pharmaceuticals
company in Bangladesh including local and MNC’s are - Square, Incepta Pharma, Beximco, Opsonin Pharma, Eskayef, Renata, A.C.I.,
Aristopharma, Drug International, Sanofi Aventis, GlaxoSmithKline. Market
share of those top pharmaceutical companies’ are shown on a chart below-
Year
|
Market Share
|
2006
|
3.34%
|
2007
|
2.90%
|
2008
|
2.91%
|
2009
|
2.24%
|
2010
|
1.95%
|
2011
|
1.95%
|
2012
|
2.05
|
Market share for major
segment (%)
|
||
Categories
|
2011
|
2012
|
Health food drink
|
85
|
83
|
Glucose powder
|
69
|
78
|
Vaccines
|
40
|
50
|
Dematilogicals
|
24
|
23
|
Marketing
Mechanism
GlaxoSmithKline Bangladesh
Limited has twelve District Marketing Offices (DMO) throughout the country.
These are divided in five zones by which GSK’s products are sold. The locations
of DMOs are shown below :
Zone
|
DMO
|
Dhaka
|
Dhaka, Mymensing
|
Chittagong
|
Chittagong, Noakhali
|
Comilla
|
Comilla, Shylet
|
Bogra
|
Bogra,
Rajshahi, Jessore
|
Khulna
|
Khulna,
Jessore
|
Barisal
|
Barisal
|
Distribution channels
Basically, there are three distribution
channel systems in Bangladesh: public hospitals, private hospitals and private
pharmacies.
As for the private Sector, there is a
network of wholesalers, comprising of around 1200 wholesale medicine shops. GSK
sells to wholesalers directly from the factory and also have a complementing
distribution network of its own: from their factories, the drugs are taken to a
central depot in Dhaka, then to the zonal depots in the different regions and
from there, they are sold both to wholesalers and to retailers through trained
sales representatives or distribution assistants.
Retail-sales of drugs in Bangladesh are
allowed only under direct supervision of a pharmacist registered with the
Pharmacy Council of Bangladesh. The licenses for retail pharmacies and for
wholesalers are also being controlled by the Drug Administration of Bangladesh.
There are close to 76,000 licensed retail pharmacies in the country, and an
estimated 125,000 unregistered retail pharmacies. In addition, drugs like
antibiotics can also be found in village shops etc. without proper supervision.
Whereas the law foresees no OTC drugs, requiring all drugs to be dispensed
through a prescription, in fact all medicines are available without any
prescription.
Bangladesh’s drug distribution marketplace
is composed of small independent pharmacies. GSK sells its products to private
sector pharmacies, the government and its public health care facilities, or to
international organizations operating in Bangladesh (e.g., UNICEF). Government
sales are not as profitable as private sector sales because the government pays
less, on consignment, and at times, after considerable delay.
Dividend policy
There are four stylized
facts of dividend.
1. Firms have a long run dividend payout ratio.
ü This
ratio is that fraction of earning which the company intends to pay out as
dividends.
2. Managers focus on dividend changes rather
than absolute levels of dividends.
ü Paying
a $2 dividend is important if last year’s dividend was $1. It is unimportant if last year’s dividend was
$2.
3. Dividend changes respond to long-run sustainable
changes in earnings, but not to short-run changes.
ü Managers
are unlikely to change dividends in response to temporary variations in
earnings.
ü Instead,
they “smooth” dividends.
4. Managers are reluctant to make dividend changes
which might have to be reversed.
ü They
are particularly worried about having to reverse a dividend increase.
Dividend policy of GSK
Dividend
distribution to the Company's shareholders is recognised as a liability in the
financial statements in the period in which the dividends are approved by the
Company's shareholders. The company is giving dividend in every year. Average
dividend payout ratio is around 60%. The company declares dividend per share.
Year
|
Dividend per share ( tk )
|
Dividend payout ratio (%)
|
Effective dividend yield
|
2008
|
06
|
50.56
|
1.81
|
2009
|
16
|
59.53
|
2.28
|
2010
|
20
|
58.74
|
2.29
|
2011
|
15
|
64.06
|
1.93
|
2012
|
15
|
74.07
|
2.27
|
SWOT Analysis
SWOT is the acronym for Strengths, Weaknesses,
Opportunities and Threats. It is an analytical framework to help summarize in a
quick and concise way the risk and opportunities for any company across the
value chain. A good SWOT should look into internal and external factors
affecting the issue at hand.
- Factors
pertaining to the internal environment of the company. These are usually
classified as Strengths (S) or Weaknesses (W)
- Factors
that pertaining to the external environment of the company. These are
classified as Opportunities (O) or Threats (T).
Strength
|
Weakness
|
Ø GSK is considered as world's one of the leading
pharmaceutical companies because of its performance.
Ø Efficient, capable and honest workforce
Ø GSK has intense demand of their product nationally
and internationally which helps them to inflate their business
Ø Considerable financial resources to grow the
business
Ø Proprietary technology and importance patents
Ø Ability to take advantage of economies of scale
Ø Better product quality relative to rivals
Ø Goodwill of the company
Ø Follows GMR-Good Manufacturing Practice
|
Underutilized
plant capacity
Ø
Higher unit
cost relative to key competitors
Ø
Group
compliance due to group policy the company has to import raw materials form
UK rather from neighbor countries (other than those which are produces
locally) resulting in higher cost of production.
Ø
Lack of variety
in products
Ø
Low pack size
Ø
Lack of sufficient
promotional effort.
Ø
GSK has weaker
distribution network and sales force are relatively low compare to
competitors.
|
Opportunities
|
Threats
|
Ø GSK as a multinational company has opportunity for
expand its investment and has potential growth in Bangladeshi market.
Ø Expanding the company’s product line to meet a
broader range of customer reeds.
Ø Target and acquire an untapped marketing for
vaccines
Ø Market is significantly large and growing
Ø Proper utilization of vaccines may result in higher
profit.
Ø Availability of natural resources is the most
lucrative opportunity for GSK to work with Bangladesh.
Ø In Bangladesh, GSK can get labors at a very cheap
cost.
Ø High confidence brand name and quality
|
Ø
Adverse shifts
in foreign exchange rates and trade policies of government
Ø
Aggressive
movement of rivals
Ø
Slow down in
market growth
Ø
Growing
bargaining power of the end consumers, thus high priced medicine are
inconvenient for them
Ø
Costly new
regulatory requirements Competitors lower prices
Ø
Increasing
threats from local competitors
|
Industry
Analysis
In Bangladesh, the pharmaceutical sector is one of the
fastest growing sectors.. In 2008 the total size of the pharma market in
Bangladesh was estimated to be USD 700 million and is growing at a steady rate.
The pharmaceutical sector is the second highest contributor to the National
Ex-Checker and the largest white collar labor intensive employment sector of
the country. There are 245 registered pharmaceutical manufacturing companies in
Bangladesh. The local pharmaceutical manufacturers cater to about 97% of the
internal demand.
Today, Bangladesh Pharmaceutical Industry is
successfully exporting APIs and a wide range of products covering all major
therapeutic classes and dosage forms to 71 countries. Beside regular forms
like; Tablets, Capsules & Syrups, Bangladesh is also exporting high-tech
specialized products like HFA Inhalers, CFC Inhalers, Suppositories, Nasal
Sprays etc. are also being exported from Bangladesh, and have been well
accepted by the Medical Practitioners, Chemists, Patients and the Regulatory
Bodies of all the importing nations.
The Pharma Industry of Bangladesh is now on the verge
of entering highly regulated overseas markets like USA and Europe. In this
connection, several pharmaceutical manufacturers have already made huge
investments in their new state of art manufacturing facilities
v Dominant Economic
Characteristics of the Industry
The dominant economic characteristics are the factors
that influence the overall operations of the players in it. The following table
is the summary of the factors:-
► Market size
► Product Characteristics
► Scope of
competitive rivalry
► Presence of
learning effects
► Market growth
rate
► Industry
profitability
► Life cycle
stage
► Target &
end consumers
► Type of
distribution channel used
Factors
|
Description
|
1. Market size Taka
|
7,186 Crore
|
2. Scope of competitive rivalry
|
National. In some case it is regional
|
3. Market growth rate
|
5% to 7% annually on an average
|
4. Life cycle stage
|
Mature, continuous research does not let the
curve decline
|
5. Target customer & end consumers
|
The doctors are the target customer & the end
consumers are the general people
|
6. Type of distribution channel used
|
Wholesaler and retailer. In some cases (like
vaccines) it is done through special outlet
|
7. Product Characteristics
|
Standardized and no scope of customization
|
8. Presence of learning effects
|
Yes, especially in drug research and
formulation
|
9. Industry profitability
|
Above par, ultimately it is affected by the state
of national economy.
|
Table 2: Summary of the key factors
GSK’S Market Share & Position Comparison (2012)
|
||
Companies
|
Market share
|
Ranking
|
SQUARE PHARMA
|
19. 18%
|
1
|
INCEPTA
|
9.05%
|
2
|
BEXIMCO
|
8.62%
|
3
|
OPSONIN PHARMA
|
4.94%
|
4
|
ESKAYEF
|
4.84%
|
5
|
RENATA
|
4.73%
|
6
|
ACME
|
4.44%
|
7
|
A.C.I.
|
4.08%
|
8
|
ARISTOPHARMA
|
3.99%
|
9
|
DRUG INTERNATIONAL
|
3.75%
|
10
|
SANOFI AVENTIS
|
2.57%
|
11
|
GLAXOSMITHKLINE
|
1.95%
|
12
|
Table 4: GSK’s Market Share & Position
Porter’s
five forces
The five forces analysis is done on the basis of the
most important 5 driving forces of the industry. While doing the analysis,
information gathered in the previous table is used. The most important points
that will determine the outcome of the analysis are:
v Moderate market growth due to
the export potential
v Exit barrier of the industry is
very high due to high investment.
v Specialization knowledge for the
technology and research is must for a player.
v No actual substitutes for
pharmaceutical products are available.
v The players are Suppliers are
chosen on a competition basis.
v Many brands for the same products are available
in the market
v Big
and powerful enough to influence input cost.
.
v End consumers are not really aware of the quality of
the products.
v Direct marketing of the products is illegal as per
government rules.
So the
summary of the entire analysis refers to the scenario which is as such:
Industry Analysis -
At a glance
|
|
Forces
|
Position
|
Threat of potential entry
|
Very low
|
Threat of substitute products
|
Very low
|
Bargaining power of the suppliers
|
Very low
|
Bargaining power of the buyers
|
Very high
|
Rivalry among the competitors
|
Moderate to High
|
Exporting
Export
of pharmaceutical products of Bangladesh is still in infancy. But the rate of
establishment of pharmaceuticals industries in private sector is increasing and
they have already entered the export market with their finished products. In
2000, Bangladesh imported US$84,000,000 worth of medicinal and pharmaceutical
products and had negligible exports and some recent statements by industry
representatives suggest that exports will increase in the near future.
Bangladesh is exporting their pharmaceuticals products to Vietnam, Singapore,
Myanmar, Bhutan, Nepal, Sri Lanka, Pakistan, Yemen, Oman, Thailand, and some
countries of Central Asia and Africa. It also has a large market in European
countries.
Ratio analysis
Liquidity Ratio:
perticulars
|
2008
|
2009
|
2010
|
2011
|
2012
|
Quick ratio
|
1.2275
|
1.6865
|
1.6050
|
0.9573
|
1.0509
|
current ratio
|
2.9606
|
3.1091
|
2.5934
|
1.8877
|
1.7898
|
 |
Comment: From the graph
and table, we can see that the current ratio of the company is quite
satisfactory that indicates that the company’s ability to pay its current
liability is quite good. Both current
ratio and quick ratio is decreasing over time. That shows that the liquidity
position is deteriorating.
Activity/ Efficiency
Ratio:
perticulars
|
2008
|
2009
|
2010
|
2011
|
2012
|
Total asset turnover Ratio
|
1.4039
|
1.7965
|
1.6568
|
1.6963
|
1.8125
|
Account Receivable turnover Ratio
|
7.2879
|
8.3270
|
10.9584
|
12.4988
|
|
Inventory turnover Ratio
|
1.1738
|
1.5925
|
1.3030
|
1.5405
|
 |
Comments: GSK’s total asset turnover
and inventory turnover ratio is somewhat stable over time. But account
receivable is increasing over time. This shows that the company’s accounts
receivables are being collected quickly and average collection period is
decreasing which is beneficial for the company.
Leverage/ Solvency Ratio
perticulars
|
2008
|
2009
|
2010
|
2011
|
2012
|
Times interest earned ratio
|
25.2802
|
529.0650
|
675.0976
|
124.7909
|
80.4987
|
Fixed charge coverage ratio
|
19.7915
|
219.3877
|
261.3692
|
45.1829
|
32.1708
|
 |
Comments: Both the solvency ratio
of the company was very low in 2008. The
solvency condition of the company increases during 2009 and 2010. It again
started to decline during 2011 as it made a large lease payment. But it still
earns 80 times more than its interest payment in 2012. This indicates that it
has adequate capacity to pay its interest.
Profitability Ratio
perticulars
|
2008
|
2009
|
2010
|
2011
|
2012
|
Gross profit ratio
|
0.2498
|
0.3123
|
0.3420
|
0.2848
|
0.2861
|
Operating profit
ratio
|
0.1128
|
0.1454
|
0.1524
|
0.0991
|
0.0746
|
Net profit ratio
|
0.0757
|
0.1071
|
0.1129
|
0.0596
|
0.0439
|
Return on equity
|
0.1567
|
0.2782
|
0.2970
|
0.1983
|
0.1642
|
Return on asset
|
0.1063
|
0.1924
|
0.1871
|
0.1010
|
0.0796
|
Profitability
Ratio
|
 |
 |
Comments: All the three
profitability measures indicate that profitability of the company was low
during 2008 and it increases in 2009 and 2010. But it decreases again to the
previous level in 2011 and 2012. ROA and ROE shows the same patterns. This
indicates that the profitability of GSK is decreasing in 2011 and 2012.
Market based ratio:
 |
 |
Comments:
P/E ratio is somewhat stable over times. In 2012, P/E ratio of GSK was 27.81.
This indicates that investors need to pay 27.81 taka for each taka of earning.
Net asset value is much lower than market value. In 2012, NAV per share was
75.73 where market price per share was 330 taka.
Comparison of GSK ratio with
industry average and Benchmark
Liquidity Ratio:
 |
Comments: From the graph, it is shown
that current ratio of GSK is more than both industry average and benchmark,
square. The quick ratio also shows the
same thing. It is also greater than industry and square. This indicates that
the liquidity position of GSK is better than industry and square
Profitability
Ratio:
 |
 |
Comments: Return
on asset of GSK is more than industry average but less than benchmark, square.
On the other hand, Return on equity is more than square but less than industry
average. Gross margin ratio is less than both industry and square pharma. Net
profit margin also indicate the same as gross profit margin.
Activity Ratio:
 |
Comments: Total
asset turnover of GSK is more than square but less than industry average.
Inventory conversion period is less than both square and industry average.
Average collection period of accounts receivable is also less than both
industry average and square.
Coverage Ratio:
 |
Comments: Times
interest earned is more than both square and industry average by a significant
amount. This indicates GSK has higher ability to pay its interest payment.
DuPont Analysis
2008
|
2009
|
2010
|
2011
|
2012
|
|
Operating profit margin
|
0.1128
|
0.1454
|
0.1524
|
0.0991
|
0.0746
|
Total asset turnover
|
1.4039
|
1.7965
|
1.6568
|
1.6963
|
1.8125
|
Interest burden
|
0.9604
|
0.9981
|
0.9985
|
0.9920
|
0.9876
|
After Tax Retention Rate
|
0.6986
|
0.7379
|
0.7421
|
0.6062
|
0.5960
|
Financial leverage
|
1.4744
|
1.4463
|
1.5873
|
1.9626
|
2.0627
|
ROE
|
0.1567
|
0.2782
|
0.2970
|
0.1983
|
0.1642
|
Sensitivity with respect to
operating profit margin
Particulars
|
2008
|
2009
|
2010
|
2011
|
2012
|
ROE
|
0.1567
|
0.2019
|
0.2117
|
0.1376
|
0.1037
|
CV
|
27.7097
|
||||
Sensitivity with respect to
Total asset turnover
Particulars
|
2008
|
2009
|
2010
|
2011
|
2012
|
ROE
|
0.1567
|
0.2005
|
0.1849
|
0.1894
|
0.2023
|
CV
|
9.8179
|
||||
Sensitivity with respect to
interest burden
Particulars
|
2008
|
2009
|
2010
|
2011
|
2012
|
ROE
|
0.1567
|
0.1629
|
0.1629
|
0.1619
|
0.1611
|
CV
|
1.5902
|
||||
Sensitivity with
respect to After Tax Retention Rate
Particulars
|
2008
|
2009
|
2010
|
2011
|
2012
|
ROE
|
0.1567
|
0.1655
|
0.1664
|
0.1360
|
0.1337
|
CV
|
10.4521
|
||||
Sensitivity with
respect to After Tax Retention Rate
Particulars
|
2008
|
2009
|
2010
|
2011
|
2012
|
ROE
|
0.1567
|
0.1537
|
0.1687
|
0.2086
|
0.2192
|
CV
|
16.7850
|
||||
Decision: From the above
tables we can see that ROE of GSK is most sensitive with respect to profit
margin because the coefficient of variance is highest, 27.7097. After net
profit margin, there come after tax retention rate and after tax retention
rate. Roe of GlaxoSmithKline is least sensitive with respect to interest
burden.
Potential Red flags
Perticulars
|
2009
|
2010
|
2011
|
2012
|
Sales growth rate
|
0.60143
|
0.20122
|
0.30369
|
0.17290
|
A/R growth rate
|
(0.02582)
|
0.13051
|
-0.13309
|
0.21456
|
Inventory growth rate
|
0.02402
|
0.13874
|
0.63808
|
(0.06963)
|
Gap between reported income and OCF
|
(130128000)
|
(205038000)
|
(208099000)
|
(283654000)
|
Red flags
Ø In the year 2009 and 2011, Sales
grows at a substantial rate but accounts receivables decreases which usually
does not happen. It is inconsistent with general trend.
Ø
In the year 2011, sales increased by 30 % but
inventory increased 63%. It may be a potential red flag. In the year 2012,
sales increased by 17% but inventory decreased by 6%
Ø
The gap between OCF and reported income is
increasing over time for the last four year substantially which is potentially
a red flag.
Ø
The
company has related party transactions. It made transaction of large amount
with its parent company, setfirst company, uk in each year.
Ø
Its finance income is growing at an abnormal
rate though it has no investment in securities market.
Earning quality:
Perticulars
|
2009
|
2010
|
2011
|
2012
|
Balance sheet based aggregate accruals
|
-60850000
|
-134315000
|
-63402000
|
-185580000
|
Balance sheet based accruals ratio
|
-0.06915967
|
-0.17170001
|
-0.0927734
|
-0.33203558
|
Cashflowstatement based accruals
|
-60850000
|
-134315000
|
-116917000
|
-143172000
|
Cashflowstatement based accruals ratio
|
(0.06916)
|
(0.17170)
|
(0.17108)
|
(0.25616)
|
Comments: From the table, we can see that both the
balance sheet accrual ratio and cash flow statement based accrual ratio is
negative. This indicates that the quality of earning is good and there is less
manipulation. The earnings quality is better because there is less of an
accrual impact on earnings and more of a cash impact. The quality of earning is
increasing over time.
Analysis of cash flow statement:
Particulars
|
2008
|
2009
|
2010
|
2011
|
2012
|
OCF
|
66140000
|
453915000
|
615215000
|
490167000
|
527621000
|
Free cashflow
|
408225942.6
|
544797053.1
|
411129931.1
|
554462767.2
|
|
Types
|
Cash cow
|
Cash cow
|
Cash cow
|
Cash cow
|
Cash cow
|
Ø
From
the table we can see that in all the years both operating cash flow and free
cash flow are positive. This indicates that the company is in a cashcow
position. The company generates enough operating income but new profitable
investment opportunity is less. So it has large amount of free cash flow.
Cash flow Trends
Ø From
the above graph we can see that all the three cash flows are increasing over
time. Both OCF and FCF are upward up to
2010 which indicates that the cash flows of subsequent year is more than
previous year. At 2011 it declines and in 2012 it again started to rise.
Ø
Cash flow from investment is downward indicating
the company is investing more money in every year.
Sustainable growth
Perticulars
|
2008
|
2009
|
2010
|
2011
|
2012
|
ROA
|
0.106288
|
0.192375
|
0.187101
|
0.101049
|
0.079618
|
Retention
Ratio ( b )
|
0.789323
|
0.77677
|
0.530096
|
0.145848
|
0.259338
|
Sustainable
growth
|
0.091578
|
0.175684
|
0.110101
|
0.014958
|
0.021083
|
Actual
growth
|
0.601432
|
0.20122
|
0.303689
|
0.172898
|
·
If
sustainable growth is greater than actual growth, the company might be
underperforming. If actual growth is greater than sustainable growth, the
company may run into trouble because of unrestrained growth.
·
For GSK, the actual growth was greater than sustainable growth which indicates that the
company may fund from risky sources such as increasing the debt level or plow
profits
·
As actual growth exceeds sustainable growth for
longer periods, management must formulate a financial strategy from among the
following options: 1) sell new equity; 2) permanently increase financial
leverage (i.e, take on more debt); 3) reduce dividends; 4) increase the profit
margin; or 5) decrease the percentage of total assets to sales.nto the company to sustain such activity
Value addition
Earnings
per share
|
44.35
|
COST of Capital
|
0.127637
|
No growth value
|
347.51
|
Intrinsic value per share
|
663.83
|
Value addition
|
316.32
|
Comments: Present
value of growth opportunity of GSK is 316.32 taka. So the company has added
value by this amount. This is the additional value of GSK in addition to no
growth value.
Leverage
Perticulars
|
2009
|
2010
|
2011
|
2012
|
Operating
leverage
|
1.7687
|
1.2878
|
(0.5026)
|
(0.6732)
|
Financial
Leverage
|
1.1892
|
1.0296
|
2.0463
|
1.1605
|
Total leverage
|
2.1034
|
1.3259
|
(1.0284)
|
(0.7812)
|
Decision:
v
Operating leverage: From the chart and table, we can see that in
2009 and 2010, operating leverage is 1.8 and 1.3 respectively. This
indicates that if sales increase by 1%, earnings increase by more than 1% i.e
by the amount of operating leverage. But in the year 2010 and 2011, operating
leverage is negative which indicates that if sales increase by 1%, earning
decreases by .5% and .7% respectively. This may occur from the increase of
other cost such as marketing and administrative cost due to increase of sales.
v
Financial
Leverage: GSK has a positive degree of financial leverage over time. This
indicates that if operating income increases by 1%, EPS increases. In all the
years, EPS increases by more than 1% due to change in EBIT. In the year 2011,
degree of financial leverage was high. EPS increased by more than 2% for 1%
change in operating income.
v
Total
leverage: Total leverage is the product of operating leverage and financial
leverage. For the year 2009 and 2010 total leverage was positive that increase
in sales increases EPS. But in 2011 and 2012, total leverage was negative
indicating increases in sales decreases EPS.
Quality of disclosure
Mandatory disclosure:
The
Company’s mandatory disclosure is satisfactory. The auditor of the company
gives it unqualified opinion. It complied with all rules regarding mandatory
disclosure rules issued by company act and SEC.
Voluntary
disclosure:
v
The company provides adequate disclosure to
assess the firm’s business strategy and its economic consequences. The firm
uses the “statement of chairman”, “Directors report to the shareholders ‘in
their annual financial statement to clearly explain the firm’s industry
condition, business outlook, competitive position, future business plans.
v
GSK provides footnote for all the items of the
financial statement. It gives adequate information to asses each item,
assumptions and their logic. It provides information about significant account
policies, Rate used in the calculation of several items and all other important
items.
v
As GSK is in multiple business segments, it
provides some information about each segment. Revenue is given segment-wise as
well as product-wise. But cost is given only segment-wise, not product-wise.
Management also provides information about each segment performance and market
share of each segment. Assets and liabilities of each segment are given in the
note.
v
The firm explains its current performance in the
“report to the shareholder” and “statement of the chairman. In the “ management
discussion and analysis “ segment of the report, it provides large amount of
information
v
The company provides adequate voluntary
disclosure about its risk exposure. It explains in the note about the potential
risk it may face.
From the above point,
It is clear that the company’s voluntary disclosure is satisfactory.
Management Discussion
and Analysis
a.
Industry outlook and possible future
developments in the industry.
b. Business Performance
2012
was a tough year for the pharmaceuticals part of the Company as it grappled
with many issues including generic competition and stock outs. Vaccine stock
outs of its key brands affected business and for the first time since the start
of the business, it lost a key vaccine tender for one of its vaccines.
c. Risks and
Concerns
The Company has a robust system
of managing its business risk which has been described under Corporate
Governance Chapter and in Notes-45 of the Financial Statements.
d. Financial Performance
Net
sales of the Company for the year 2012 were Tk.5554 million against Tk.4735
million of last year, showing a net growth of 17.3% over last year. Gross
Profit of the Company in 2012 improved slightly from last year despite the
pressure from currency devaluation in the 1st half of the year; however GP
growth is almost in line with sales growth. Increased investment in Advertising
& Promotion of the product in establishing the consumer brands in the
market and safekeeping charges for storing products at distributor's end
resulted in higher operating expenses. As a consequence of that, the Company's
Operating Profit in 2012 was lower compared to last year.
e. Extra-Ordinary gain or loss
There is no extra-ordinary gain
or loss during the year.
f. Related party transactions
During
the year, the Company carried out a number of transactions with related parties
in the normal course of business and on an arms' length basis. The names of
these related parties, nature of these transactions and their total value have
been set out in accordance with the provisions of BAS-24: Related party disclosure.
·
Transactions
with related parties were carried out on commercial terms and conditions and at
prices agreed based on intercompany prices
g. Utilization
of proceeds from public issues
Not applicable
h. Explanation of financial results after IPO
Not applicable
i. Significant Variance between Quarterly and Annual
Financial Statements
There
are no significant variance between Quarterly Financial Performance and Annual
Financial Statements.
j. Remuneration to Directors
The
remuneration, performance and related bonus of Executive Directors are reviewed
and approved by the above country management. The Executive Directors and some
senior employees of the Company are entitled to Stock Options and Share Value
Plan of GlaxoSmithKline plc,UK.
Independent
and Non-Executive Directors other than Directors who are in the employment of
the GlaxoSmithKline Group Companies are paid attendance fees of Tk.5,000/ per
meeting as remuneration.
.
k. Financial Reporting Framework
i. The financial
statement prepared by the management of the Company present fairly its state of
affairs, the result of its operations, cash flows and changes in equity.
ii. Proper
books of accounts of the Company have been maintained.
iii. Appropriate
accounting policies have been consistently applied in preparation of the
financial statements and that the accounting estimates are based on reasonable
and prudent judgment.
iv. International
Financial Reporting Standards (IFRS), as applicable in Bangladesh have been
followed in preparation of the financial statements.
v. The Company
maintains a sound internal control system which gives reasonable assurance
against any material misstatement of loss. The internal control system is
regularly reviewed by the Audit Committee in each meeting and by the Company
Executive Committee on quarterly basis.
vi. There are no
significant doubts upon the Company's ability to continue as a going concern.
Choice of accounting policy
v
These
financial statements have been prepared under the 'historical cost' convention
except for certain operating fixed assets which were revalued in 1978.
v
This
financial statements cover the financial year from 1 January to 31 December
2012, with comparative figures for the financial years from 1 January to 31
December 2011
v Judgments
and estimates are based on historical experiences and other factors, including
expectations that are believed to be reasonable under the circumstances. Hence
actual experience and result may differ from these judgments and estimates.
v
Property,
plant and equipment (PP&E): PPE are valued at cost less accumulated depreciation and
impairment. Capital work-in-progress is stated at cost. Maintenance and normal
repairs are expensed as incurred while major renewals and improvements are
capitalised.
v Impairment of PP&E: The carrying values of all
PP&E are reviewed for impairment on annual basis to assess whether there is
any indication that the assets might be impaired. Any provision for impairment
is charged to the statement of comprehensive income in the year concerned.
v Depreciation
Depreciation is
provided on straight line method at the annual rates shown below and leasehold
land is amortised annually in such a manner that at the end of the period of
lease the land is fully amortised:
Category
of PP&E Rate (%)
Freehold
buildings 2.5
Plant
and machinery 5 & 10
Furniture,
fixtures and equipment 10, 12.5 & 15
Computers 25 &
33.33
Vehicles
25
v
Basis
of valuation of inventories
Category
|
Basis of valuation
|
Finished products and
Work-in-process
|
At the lower of cost
or net realisable value. The cost includes allocation of production overheads
that relate to bringing the inventories to their present condition and
location.
|
Raw and packaging
materials
|
At the lower of cost
or net realisable value
|
Stores
and spares
|
At the lower of
weighted average cost or net realizable value.
|
Materials & stores
in-transit
|
At cost including
related charges
|
v Deferred tax
Deferred income tax is provided in full,
using the liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the financial
statements. Currently enacted tax rates are used in the determination of
deferred income tax.
v Revenue recognition
Revenue represents product invoiced
during the year to customers net of value added tax, rebates, discounts and
commission. Revenue also includes contract manufacturing charges invoiced to
customers for services rendered
v Leases
Leases are classified as finance leases
whenever the terms of the lease transfer substantially all the risks and
rewards of ownership to the lessee. All other leases are classified as
operating lease.
v Dividend distribution
Dividend distribution to the Company's
shareholders is recognized as a liability in the financial statements in the
period in which the dividends are approved by the Company's shareholders.
v Gratuity Fund:
The Company
operates an unfunded gratuity scheme, provision in respect of which is made
annually covering all its eligible permanent employees other than the
management staff.
v Pension Fund:
The Company contributes (based on actuarial
valuation of 2012) to a recognized pension fund which is operated for its
eligible permanent management staff. The fund has now been closed to new
entrants joining the Company on and after 1 September 2012.
v
Financial assets and liabilities
Financial
assets and liabilities are offset and the net amount is reported in the
financial statements only when there is legally enforceable right to set-off
the recognized amounts and the Company intends either to settle on a net basis,
or to realize the assets and to settle the liabilities simultaneously
Off balance sheet
items
v
As
the company does not use any long term debt, it uses a large amount of lease of
equipments. Operating leases are
recorded as off balance sheet item
v It shows its contingent
liability as off balance sheet items. It has several contingent liabilities
including bank guaranty.
Economic Characteristics and strategies
Traditional
market structure analysis appears deceptively simple. Begin by ascertaining the
structure of the industry in which a firm operates. (Is it competitive,
monopolistic, monopolistically competitive, or oligopolistic?) This market structure
almost is assumed to rigidly determine each firm's conduct (output decisions and pricing behavior), which yields an
industry's overall performance
(e.g., its efficiency and profitability). This approach called the structure-conduct-performance
paradigm (S-C-P theory).
Traditional S-C-P theory dictates three steps in analyzing an industry. First,
it emphasizes properly categorizing an industry's market structure according to
(a) the number of active competitors, (b) barriers to entry
and exit, and (c) the extent of product standardization. Second,
conventional models conclude that certain pricing and output decisions
(conduct) predictably arise from market power or its absence. (Sparse
competition, barriers to entry, or product heterogeneity create market power.)
Finally, this theory suggests that the equilibrium price of any imperfectly
competitive firm invariably exceeds marginal social cost; too little of the
good is produced, creating allocative and productive inefficiencies.
Movement
along the continuum of market structures from monopoly toward pure competition
appears to yield more efficient resource allocations. Consequently, the
structure-conduct-performance approach suggests that government policy to cure
problems of industrial organization is straightforward---outlaw monopolies or
near monopolies where possible, while tightly regulating market power that
arises from economies of scale.
Thus, the S-C-P approach indicates that competition is the most efficient
structure for an industry, and unregulated monopoly, the least. According
to the theory of contestable markets, however, business tactics are not
determined by structure alone. But antitrust policy is intended to diffuse
market power, as is much of the economic regulation of business. Moderate
market growth due to the export potential
S-C-P analysis of GSK
v
Exit
barrier of the industry is very high due to high investment.
v
Specialization
knowledge for the technology and research is must for a player.
v
No
actual substitutes for pharmaceutical products are available.
v
The
players are Suppliers are chosen on a competition basis.
v
Many
brands for the same products are available in the market
v Big
and powerful enough to influence input cost
The growth of the country’s domestic pharmaceutical market
to the tune of $1.13 billion in terms of value, as it stands now, is quite a
positive development. Such a development has occurred because of decreasing
dependence on imported drugs. Currently about 97% of the total requirement of
medicines is created by the local companies and the rest 3% is imported.
Valuation
Pro forma income statement
Pro forma Balance sheet
Free cashflow and share price determination
Relative valuation
Relative Valuation
|
||||
GSK
|
Square
|
Square Market value
|
GSK value
|
|
Price
to sales
|
5,553,812,000
|
18,592,856,236
|
237.3
|
70.88
|
price
to cash flow ratio
|
527621000
|
3645010743
|
237.3
|
34.35
|
Price
to NAV
|
75.73
|
61.42
|
237.3
|
292.59
|
Price
to par value
|
10
|
10
|
237.3
|
237.30
|
PRICE
earning multiple
|
28.14814815
|
21.69
|
237.3
|
307.96
|
Policy Implication
BCG Matrix
Low Growth Rate High
|
  |
High Market share Low
|
|
GSK
has low market share but industry growth rate is high. So the company is in
question mark segment. This is the starting point for most business. As
question mark has potential to gain market share and become star, it suggests
that the company should make more investment. If question marks do not succeed
in becoming market leader, then after years of cash consumption, it will
eventually become dogs.
So
the required action for GSK’s manager is to carefully analyze the growth and
make additional investment if the opportunity is truly promising. Successful
investment will help it to become star and to generate more profit.
Conclusion
The performance of GSK is quite satisfactory. It has
absolute competitive advantage in some product such as consumer health drinks
and vaccines. Its several ratio shows that in some case, it is performing
better than industry leader square and industry average. On the other side, in
some criteria it is performing badly than square and industry average.
ROE
of GSK is most sensitive with respect to profit margin because the coefficient
of variance is highest in case of net profit margin. After net profit margin,
there come after tax retention rate and after tax retention rate. Roe of
GlaxoSmithKline is least sensitive with respect to interest burden.
This indicates that the quality of earning is good
and there is less manipulation. The earnings quality is
better because there is less of an accrual impact on earnings and more of a
cash impact. The quality of earning is increasing over time. For GSK, the actual
growth was greater than sustainable growth which indicates that the company may
fund from risky sources such as increasing the debt level or plow profits
Both
operating cash flow and free cash flow are positive. This indicates that the
company is in a cashcow position. The company generates enough operating income
but new profitable investment opportunity is less. So it has large amount of
free cash flow.
The company has some potential red flags. Gap between sales
and inventory, sales and A/R, net income and operating cash flow are increasing
over time.
Finally, the intrinsic value
of the firm is much higher than the market value. This indicates that the share
price of the company is undervalued. So management should take initiatives to
increase the share price
Appendix
Assumptions
v
sales
growth rate of 2009 is considered as outlier
v
Geometric
mean of sales growth rate is used
v
Perpetual
growth rate is 2 %
v
As there
is finance income but no investment, Average finance income is used
v
Finance
cost is calculated on finance lease obligation
v
Average
tax rate is used
v
Share
capital, general reserve and capital reserve is assumed to be constant
v
Risk free
rate is 7.1%
v
As there
is no debt, cost of capital is considered as WACC
Beta
calculation
Covariance
|
0.0094
|
Variance of market return
|
0.0117
|
Beta
|
0.8026
|
Market return
|
0.0118
|
Market return -yearly
|
0.1416
|
WACC
Risk-free rate
|
0.071
|
Market return
|
0.14156391
|
Beta
|
0.80262722
|
Cost of equity
|
0.12763652
|
Market
Based Ratio
2008
|
2009
|
2010
|
2011
|
2012
|
|
P/E ratio
|
28.15
|
28.37
|
33.17
|
26.98
|
27.81
|
Net assets value per share
|
123.32
|
118.07
|
114 .66
|
96.61
|
75.73
|
Dividend yield ratio
|
2.27
|
1.93
|
2.29
|
2.28
|
1.81
|
Ratio
Current ratio
|
Quick Ratio
|
|
GSK
|
1.7898
|
1.0509
|
Square
|
1.5861
|
0.9541
|
Industry
|
1.3915
|
0.7390
|
ROA
|
ROE
|
Gross profit margin
|
Net Profit margin
|
|
GSK
|
0.0796
|
0.1642
|
0.2861
|
0.0439
|
Square
|
0.1351
|
0.1121
|
0.4289
|
0.1805
|
Industry
|
0.0727
|
0.1684
|
0.4431
|
0.1034
|
Total asset turnover
|
Inventory turnover
|
A/R turnover
|
|
GSK
|
1.8125
|
1.5405
|
12.4988
|
Square
|
0.7483
|
3.4107
|
19.8617
|
Industry
|
1.9574
|
2.1886
|
15.7786
|
Times interest earned
|
|
GSK
|
80.4987
|
Square
|
10.1769
|
Industry
|
28.7479
|
GSK
|
square
|
reneta
|
Ambee
|
Industry
|
|
Current ratio
|
1.7898
|
1.5861
|
1.1506
|
1.0395
|
1.391512
|
Quick ratio
|
1.0509
|
0.9541
|
0.4600
|
0.4909
|
0.738983
|
ROA
|
0.0796
|
0.1351
|
0.0480
|
0.0280
|
0.0727
|
ROE
|
0.1642
|
0.1121
|
0.2441
|
0.15329
|
0.1684
|
Gross profit margin
|
0.2861
|
0.4289
|
0.5282
|
0.5291
|
0.4431
|
Net profit margin
|
0.0439
|
0.1805
|
0.1614
|
0.0280
|
0.1034
|
Total asset turnover
|
1.8125
|
0.748326
|
4.3143
|
0.95451
|
1.9574
|
Inventory turnover
|
1.5405
|
3.410667
|
2.757244
|
1.0458
|
2.1886
|
A/r turnover
|
12.4988
|
19.86168
|
24.78488
|
5.96895
|
15.7786
|
Times interest earned
|
80.4987
|
10.17692
|
11.6613
|
12.6548
|
28.7479
|
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