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GSK Consumer: Growth at margins' expense - Views on News from Equitymaster
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GSK Consumer: Growth at margins' expense
Jan 27, 2010

Performance summary
  • The company has seen strong sales with growth of 27% YoY for 4QCY09.
  • Operating (EBITDA) margins for the company in 4QCY09 fell by 2.4% to stand at 12%. This fall comes due to higher advertisement costs (as a percentage of sales) during the quarter.
  • Bottom line for 4QCY09 grew by 3.4% YoY on the back of higher sales and lower operating costs.
  • Net profit for CY09 grew by 24% YoY on the back higher operating income.


Rs(m) 4QCY08 4QCY09 Change CY08 CY09 Change
Net sales 3,417 4,334 26.8% 15,913 19,841 24.7%
Expenditure 2,926 3,814 30.3% 13,042 16,107 23.5%
Operating profit (EBDITA) 492 521 5.9% 2,870 3,734 30.1%
EBDITA margin (%) 14.4% 12.0%   18.0% 18.8%  
Other income 140 65 -53.4% 460 268 -41.8%
Interest 14 9 -35.0% 53 43 -20.0%
Depreciation 107 104 -2.6% 420 420 0.2%
Profit before tax 511 473 -7.4% 2,857 3,539 23.9%
Extraordinary inc/(exp) - -   - -  
Tax 185 136 -26.4% 974 1,211 24.3%
Profit after tax/(loss) 326 337 3.4% 1,883 2,328 23.6%
Net profit margin (%) 9.5% 7.8%   11.8% 11.7%  
No. of shares (m) 42 42   42 42  
Diluted earnings per share (Rs)*         55.3  
Price to earnings ratio (x)*         23.7  

What has driven performance in 4QCY09?
  • The company witnessed strong sales growth in 4QCY09 on the back of robust volume growth. Excise duty reduction also contributed to sales growth this quarter. Horlicks foodles was a new product launched this quarter.

  • Operating income was bolstered by lower input costs, lower employee costs and lower other expenditure which fell by 2%, 1.5% and 3% respectively as a percentage of sales. However, advertisement costs were higher by 118% during this quarter due to new product launches and brand building.

  • While net profit was higher during the quarter, net profit margin fell due to higher advertisement costs and lower other income.

What to expect?
At Rs.1,314, the stock is trading at 20 times our estimated CY11 earnings. GSK predominately derives its revenues from the Horlicks health drink segment. This falls under the discretionary food category. The result is that with rising food prices, consumers are cutting their spending on this category. However, to maintain sales growth, the company spent heavily on brand building this quarter. As a result of which, we witnessed pressure on margins. While the company has launched a new product category of noodles under the name Foodles, the category is very competitive with Maggie almost a generic name. We will update our model shortly.

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