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GSK Consumer: Not as bad as it seems

Feb 1, 2005

Performance summary
GSK Consumer Healthcare recently reported a much improved revenue performance for the December quarter. The company finished with an 11% revenue growth, but nearly 36% dip in profits during the quarter. For the full year 2004, the company clocked 8% revenue growth and a marginal 4% dip in profits. But the company's operating performance was encouraging, both for the quarter as well as the full year.

(Rs m) 4QCY03 4QCY04 Change CY03 CY04 Change
Net sales 1,904 2,114 11.0% 7,965 8,622 8.2%
Expenditure 1,724 1,866 8.3% 6,738 7,253 7.6%
Operating Profit (EBDITA) 180 247 37.2% 1,228 1,369 11.5%
EBDITA margin (%) 9.5% 11.7% 15.4% 15.9%
Other income 75 72 -4.8% 274 255 -7.0%
Interest 12 11 -6.1% 50 53 5.2%
Depreciation 113 112 -1.3% 456 415 -9.0%
Profit before Tax 130 196 50.3% 996 1,157 16.2%
Tax -64 71 -211.1% 232 425 83.0%
Profit after Tax 194 125 -35.8% 764 732 -4.2%
Net profit margin (%) 10.2% 5.9% 9.6% 8.5%
No. of Shares (m) 45.4 45.4 45.4 45.4
Diluted Earnings per share (Rs)* 17.1 11.0 16.8 16.1
Price to earnings ratio (x) 20.4
*(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 to 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' and ‘Crocin' in OTC portfolio. It recently also took up marketing of ‘Iodex' for GSK Pharma.

What has driven performance in CY04?
Sales: The company's revenue trend has been very volatile over the last seven quarters (see chart). However, the management seems to have corrected the supply chain concerns and is focused to grow the topline. While its flagship 'Horlicks' brand grew by over 6% during the year, 'Boost' grew by nearly 12% YoY. The company's strategy of focused relaunches and introduction of new product variants seems to be working. While the 'Mother's Horlicks' variant grew by 24% YoY, the chocolate variant grew by 29% during the year. The company's biscuit folio too posted an encouraging 17% growth.

Profitability: One of the key reasons for the expansion in operating margins is the reduction in advertising expenses as a percentage of sales, as well as control on its other expenditure. In continuation of its restructuring process, GSK Consumer has offered an ex-gratia payment to its temporary workers at Nabha plant. This offer may result into outflow of Rs 43.3 m (net of Rs 1.5 m already paid). This has been included in the staff cost of the quarter and consequently, the year. Excluding this, the operating margins would have improved by a further 2% in the quarter and by about 0.5% for CY04. Also, a higher tax burden was responsible for the decline in profits. At the PBT level, the performance was encouraging.

Cost break-up
as a % of net sales 4QCY03 4QCY04 CY03 CY04
Cost of goods sold 35.1% 35.3% 34.9% 36.2%
Staff cost 12.8% 14.2% 11.5% 11.7%
Advertising 14.7% 13.8% 12.3% 11.8%
Other exps. 25.9% 23.9% 24.0% 23.4%
Patent and trademark 1.3% 0.5% 1.2% 0.5%
Def. Rev. exps. 0.6% 0.6% 0.6% 0.6%
Total 90.5% 88.3% 84.6% 84.1%

Buyback: The company at its meeting held on December 10, 2004, proposed a buy-back at a price not exceeding Rs 370 per equity share and for an amount not exceeding Rs 1,230.3 m. Unlike other MNC majors, GSK Consumer's parent holds only 40% stake in the company. Based on the above buyback programme, we anticipate that this stake will go up to about 44% post the buyback.

What to expect?
The management has declared two interim dividends totaling Rs 7 per share. There is no final dividend. The CY04 numbers were very near our expectations of an 8.1% revenue growth and an EPS of Rs 16.7. The stock is trading at Rs 329, reflecting a P/E of 20.4 times CY04 earnings and market cap to sales of 1.7x. GSK Consumer has no doubt made some progress in reversing the decline in topline over the past few quarters. The company has also indicated the softening of raw material prices for 2005. Added to that, continued focus on growth, as well as the implementation of VAT will reduce costs over the long term, thereby improving margins. We are incorporating the CY04 numbers, as well as the above positives in our projections. We will put up the updated research report soon for your perusal.

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