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GSK Consumers: Healthy year - Views on News from Equitymaster
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GSK Consumers: Healthy year
Jan 30, 2008

Performance summary
  • For 4QCY07, the topline grows by 7.8% YoY driven by 2% YoY volume growth and the balance being contributed by realisations.
  • Operating and net profits in 4QCY07 report 30% YoY and 9% YoY growth respectively.

  • For CY07, sales are up 15% YoY, while bottomline is up 28% YoY.

Rs m 4QCY06 4QCY07 Change CY06 CY07 Change
Net sales 2,635 2,841 7.8% 11,079 12,778 15.3%
Expenditure 2,360 2,484 5.3% 9,234 10,535 14.1%
Operating profit 275 357 29.8% 1,845 2,243 21.6%
Operating margins (%) 10.4% 12.6%   16.7% 17.6%  
Other Income 169 175 3.6% 522 689 32.0%
Interest (net) 8 12 50.0% 35 46 31.4%
Depreciation 108 108 0.0% 427 435 1.9%
Profit before Tax 328 412 25.6% 1,905 2,451 28.7%
Tax 76 137 80.3% 636 825 29.7%
Profit after Tax/(Loss) 252 275 9.1% 1,269 1,626 28.1%
Net profit margin (%) 9.6% 9.7%   11.5% 12.7%  
No. of Shares (m) 42.1 42.1   42.1 42.1  
Diluted Earnings per share (Rs)*         38.6  
Current P/e ratio         15.6  
*12 months trailing earning

What has driven performance in CY07?
  • GSK Consumer’s topline grew by 15% YoY in CY07. Horlicks continued with its strong performance. The company also introduced new products recently – Women Horlicks and Actibase (cancer/diabetes related to be sold through medicinal practioners). The company witnessed a 9% YoY volume growth for the whole year. Though a dominant southern player, the company is increasing its presence in new regions and has unveiled plans of launching new products in the coming year. However, it would not undertake price hikes as this may affect volume growth. Overall, the management is expecting to retain its market share.

    Cost break-up
    As a % of net sales 4QCY06 4QCY07 CY06 CY07
    Total Cost of goods 33.7% 34.1% 34.7% 35.0%
    Staff Cost 15.4% 14.3% 12.2% 12.1%
    Advertising 12.7% 12.4% 12.9% 12.8%
    Other Expenditure 27.7% 26.7% 23.6% 22.4%

  • The operating margins improved by 1% YoY in CY07. Raw material costs (as percentage of sales) increased from 34.7% in CY06 to 35% in CY07. Milk prices in CY07 increased by 20%-25% YoY, while wheat increased by 15% YoY. The company had undertaken price hikes to offset the increase. Further, other operating heads witnessed a decline aiding the margin growth. The margins are above our estimates.

  • On the bottomline front, the company reported 28% YoY growth in CY07. Higher other income and lower depreciation costs led to the double-digit growth. However, tax rate increased to 33.7% (from 33.4% in CY06). The company outperformed our estimates by 4.8%.

What to expect?
At the current price of Rs 627, the stock is trading at a multiple of 12.5 times our CY09 earnings estimates. The company, through product innovations and cost cutting measures, is constantly improving its performance. Also, it has lined up capex plans to further increase its capacities. It is now even increasing its reach to newer areas. It would continue to leverage its strong Horlicks brand. Besides this, the company is looking at acquisitions in the health drink space to augment its product portfolio. Given that the penetration of malted drinks is expected to go up in India, we expect good performance by the company going forward. We maintain a positive view on the stock from a long-term perspective.

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