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GSK Consumers: Energising year!!!

Jan 24, 2006

Performance summary
Malted beverage major, Glaxo Smithkline Consumers (GSK) announced its fourth quarter and full year (December ending) numbers. The company reported a decent topline growth and margin expansion of 470 basis points during the quarter, which resulted in net profit outpacing topline growth during the quarter under review (up 71% YoY).

(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
Gross Sales 2,399 2,684 11.9% 9,817 10,890 10.9%
Less:- excise duty 285 261 -8.7% 1,196 1,222 2.2%
Excise as a % of sales 11.9% 9.7% 12.2% 11.2%
Net sales 2,114 2,424 14.7% 8,622 9,668 12.1%
Expenditure 1,878 2,041 8.7% 7,299 7,827 7.2%
Operating Profit (EBDITA) 236 383 62.4% 1,323 1,842 39.2%
EBDITA margin (%) 11.1% 15.8% 15.3% 19.0%
Other income 72 76 6.4% 255 243 -4.6%
Interest 11 9 -13.9% 53 42 -19.6%
Depreciation 100 107 6.4% 369 396 7.3%
Profit before Tax 196 343 74.9% 1,157 1,647 42.4%
Tax 71 129 81.2% 425 553 30.0%
Extraordinary income/(expense) - - - (23)
Profit after Tax 125 214 71.3% 732 1,071 46.4%
Net profit margin (%) 5.9% 8.8% 8.5% 11.1%
Effective tax rate (%) 36.3% 37.6% 36.8% 33.6%
No. of Shares (m) 45.4 42.1 45.4 42.1
Diluted Earnings per share (Rs)* 25.5
Price to earnings ratio (x) 23.9
*(annualised), CY = Calendar Year

What is the company's business?
GSK Consumer dominates the Rs 13 bn Indian malted beverage market with a significant 65% share (volume terms). Its white beverage brand 'Horlicks' has led the market growth of this sector in India and contributes around 80% to the company's revenues. The company's other brands include 'Boost', 'Viva' and 'Maltova'. The company also earns 4-5% fees by marketing products for SmithKline Beecham Asia Pvt. Ltd, the parent's 100% subsidiary. The subsidiary has well known brands like 'Aquafresh' in oral care segment, 'Eno', 'Iodex' and 'Crocin' in OTC portfolio.

What has driven performance in 4QCY05?
Robust topline: GSK managed to clock a commendable topline growth (15% YoY) during the quarter, seemingly on the back of higher volume sales. The company reported a 10% YoY growth in 'Horlicks' and a 14% YoY growth in 'Boost' and a 19% YoY growth in 'Maltova', during the quarter. It must be recollected that the company had recently launched a new variant of Horlicks (Toffee flavour) and has received a positive response. Revenue growth was also aided by the re-launch of 'Boost Bite' biscuits, 'Horlicks lite' in South India. As is known, GSK has been introducing new variants and flavours in a bid to pep up growth, which is reflected in the topline growth over the last couple of quarters. It must be noted that while Maltova was relaunched in November 2004, Viva was relaunched in February this year.

Margins continue to improve: Operating margins expanded by 470 basis points during the quarter, which is consequently reflected in the bottomline growth (highest during the year). It must be noted that this growth has been achieved inspite of a high base of 4QCY04. The key reason for improved profitability during 4QCY05, owing to lower milk prices, labour efficiencies in light of modernisation and reduction in other raw material prices. We believe that one of the key cost components, advertising, which stood at around 14.9% of sales in 4QCY05 is likely to remain at around the same level in the coming year. However, as per the management, raw material prices are slated to increase in CY06 (milk prices have risen by 3% to 4% already by the end of CY05).

as a % of net sales 4QCY04 4QCY05 CY04 CY05
Stock 0.3% -12.7% 0.7% -3.7%
RM 34.3% 42.7% 34.5% 36.2%
Finished goods 0.7% 0.0% 0.9% 0.2%
Staff cost 14.2% 12.8% 11.7% 11.8%
Advertising 13.8% 14.9% 11.8% 13.1%
Other exps. 24.4% 26.6% 23.9% 23.4%
Patent and trademark 0.5% 0.0% 0.5% 0.0%
Def. Rev. exps. 0.6% 0.0% 0.6% 0.0%
Total 88.9% 84.2% 84.7% 81.0%

It must be noted that the company has started production from its Baddi plant, which will result in tax savings, both at the operating level (excise) as well as the net level. The company could not fully utilise the benefits of this in CY05 and was running at only around a third of its installed capacity. In CY06, the company will make optimum utilisation of this plant and thus, excise (9.7% of 4QCY05 sales) and the tax rate of 37.6% in the quarter under review will decline in the coming quarters.

Over the past few quarters…
  4QCY04 1QCY05 2QCY05 3QCY05 4QCY05
Sales growth (YoY) 7.6% 6.2% 15.5% 10.1% 14.7%
Advertising as % of sales 14.5% 12.0% 13.0% 12.4% 14.9%
OPM (%) 8.6% 19.2% 20.3% 20.8% 15.8%
Net profit growth (%) 83.6% 35.2% 56.9% 34.0% 71.3%

What to expect?
At the current price of Rs 610, the stock trades at a price to earnings multiple of 23.9 times its CY05 earnings. GSK's performance has been no doubt encouraging during the year. The business restructuring and supply chain correction has paid off and that is good news. Also, we believe that the company will perform better in the quarters to come, as some key brands are exhibiting growth due to increased offtake. The fact that the company is reinvesting to build brands is, according to us, a big positive. However, raw material prices continue to remain volatile and are expected to increase in CY06.

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