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GSK Consumer: ‘Boost’ in volumes continue - Views on News from Equitymaster

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GSK Consumer: ‘Boost’ in volumes continue
Jan 28, 2009

Performance summary
  • Topline grows 17% YoY growth during 4QCY08. For CY08, the sales were higher by 21% YoY.
  • For the full year, operating margins are down 2% YoY. The company continued to face higher raw material costs throughout the year.
  • Net profits jumped by 18% YoY and 16% YoY respectively during both the period under consideration.
  • The board has declared a special dividend of Rs 5 per share (dividend yield of 2.6%).

Standalone financials
Rs m 4QCY07 4QCY08 Change CY07 CY08 Change
Net sales 2,943 3,436 16.7% 13,199 15,923 20.6%
Expenditure 2,487 2,932 17.9% 10,538 13,053 23.9%
Operating profit 456 504 10.5% 2,662 2,870 7.8%
Operating margins (%) 15.5% 14.7%   20.2% 18.0%  
Other Income 76 140 84.2% 270 460 70.0%
Interest (net) 12 30 152.5% 46 70 51.2%
Depreciation 108 107 -1.6% 435 420 -3.5%
Profit before Tax 412 507 23.1% 2,451 2,841 15.9%
Tax 137 181 32.6% 824 958 16.1%
Profit after Tax/(Loss) 275 326 18.4% 1,627 1,883 15.8%
Net profit margin (%) 9.3% 9.5%   12.3% 11.8%  
No. of Shares (m) 42.1 42.1   42.1 42.1  
Diluted Earnings per share (Rs)*         44.8  
Price to earnings ratio (x)*         12.8  
*12 months trailing earning

What has driven performance in CY08?
  • GSK Consumers witnessed a 17% YoY growth in topline during 4QCY08. For CY08, the sales were higher by 21% YoY. This included 7% YoY growth in value combined with 15% YoY volume growth. The company launched 3 new products this year. While Horlicks reported a 16% YoY growth, Boost grew by 10% YoY during the year. Biscuits reported a 24% YoY growth and exports contributed 10% to the total revenues. Sales from modern trade now contribute 7% of total revenues. The company has outperformed our estimates in terms of sales growth. Going forward, it is looking at targeting the value for growth proposition and also food segments to leverage the ‘Horlicks’ brand.

    Cost break-up
    As a % of net sales 4QCY07 4QCY08 CY07 CY08
    Total Cost of goods 32.9% 33.5% 33.9% 36.8%
    Staff Cost 13.8% 12.4% 11.7% 10.8%
    Advertising 11.9% 11.5% 12.4% 12.2%
    Other Expenditure 25.8% 27.9% 21.7% 22.2%

  • During the quarter, the margins declined marginally by 0.8% YoY on account of higher raw material and other expenses. For the full year, operating margins were down 2% YoY. The company continued to face higher raw material costs throughout the year. The prices of milk, sugar and malted barley witnessed double digit increase. While the prices have declined in recent times, they continue to be on higher side. The company expects ad spends to remain in the range of 12% of sales. If new products are launched, the ad spend would touch 14% of sales.

  • Net profits jumped by 18% YoY and 16% YoY respectively during 4QCY08 and CY08. Lower depreciation and higher other income (exchange gain of Rs 50 m) led to the strong growth. Interest payments included payments related to tax. The company outperformed our estimates by 6% in terms of bottomline performance.

What to expect?
At the current price of Rs 575, the stock is trading at a multiple of 10.8 times our CY10 earnings estimates. The company saw a second consecutive year of strong growth on the back of good volume growth despite price hikes. While the company did face competition, its strong brands and reach coupled with new launches and low penetration levels, helped it maintain its market share. The company took a price hike of 5.5% in January 2009. The management expects the volume growth to remain in the range of 6% to 10% going forward. New launches and brand building activity would continue. It is also increasing its focus on the rural areas and value proposition segment. GSK Consumers has planned to increase its capacities in the coming year, with a capex outlined of Rs 1.3 bn. With the malted beverage category growing a 15% YoY, the company would stand to gain.

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