Spike in fuel prices trims GSK profits

In recent months, rising costs faced by businesses have busted the age-old myth that higher sales lead to higher profits. GlaxoSmithKline Pakistan, the largest pharmaceutical company in the country, witnessed significant growth of 13.3 percent in its net sales during the third quarter of the current calendar year compared to the same period of last year. But the companys corporate result announced on Friday, October 21, 2011, showed that sales during the first nine months of 2011 were up by 14.2 percent over the same period of last year. The increase in cost of sales in the 3QCY11 was almost 10 percent as compared to 3QCY10. This imbalance in the increase in sales and cost of sales pushed up the gross profit margin for the 3QCY11 from 25.3 percent to 27.5 percent. But, higher expenditures incurred in distribution, marketing and administration eroded the potential increase in the companys net profit. In fact, the costs entailed under these heads jumped by a whopping 46 percent on the back of higher fuel prices and other cost increases. The company was able to manage its administrative expenses which were cut down by 15.7 percent. Coupled with an increase of 9.2 percent, this reduction in costs helped the company ratchet up its operating margin to 9.6 percent. The analysis of the statement shows that company has been performing well and a fall in profitability in 3QCY11 is owed to the surge in selling, marketing and distribution expenses, mainly due to the increase in fuel prices. In the first nine months of 2011, the company reported EPS of Re.4.09; which was Re.0.69 higher than the corresponding period of last year. While cost pressures have been a thorn for GSK; future prospects appear rosy for the pharmaceuticals manufacturer.

=====================================================
GlaxoSmithKline
=====================================================
(Rs mn)                   3QCY11     3QCY10       chg
=====================================================
Net Sales                  5,279      4,658       13%
Cost of sales              3,821      3,477       10%
Gross Profit               1,457      1,180       23%
Selling, marketing &
 distribution expenses       810        554       46%
Administrative expenses      171        203      -16%
PAT                          236        273      -14%
EPS (Rs)                    0.99       1.14          
=====================================================

Source: KSE notice