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GSK Cons.: Lower costs boost performance
Feb 3, 2011

GSK Consumer Healthcare Ltd. has announced its 4QCY10 results. The company has reported a 21% YoY and 59% YoY growth in sales and net profits respectively. Here is our analysis of the results

Performance summary
  • The company has seen strong sales with growth of 20.9% YoY for 4QCY10.
  • Operating (EBITDA) margins for the company rose sharply to 14.2% (as a percentage of sales) for the quarter.
  • Bottom line for the quarter grew by an impressive 58.5% YoY on the back of higher operating income, increase in other income, and fall in interest costs partly offset by increase in effective tax rates.
  • For CY10, the company's net profits increased by 28.8% YoY while the net profit margins grew by 0.9% to 12.6%. This performance comes on the back of increase in operating income, higher other income, fall in interest as well as depreciations costs and lower effective tax rates.

Rs(m) 4QCY09 4QCY10 Change CY09 CY10 Change
Net sales 4,334 5,242 20.9% 19,836 23,738 19.7%
Expenditure 3,819 4,493 17.7% 16,109 19,294 19.8%
Operating profit (EBDITA) 516 749 45.2% 3,727 4,444 19.2%
EBDITA margin (%) 11.9% 14.3%   18.8% 18.7%  
Other income 69 167 142.2% 273 498 82.5%
Interest 8 7 -12.8% 40 26 -35.5%
Depreciation 104 109 5.0% 420 397 -5.5%
Profit before tax 473 800 69.1% 3,539 4,518 27.7%
Extraordinary inc/(exp) - -   - -  
Tax 136 266 95.5% 1,211 1,520 25.5%
Profit after tax/(loss) 337 534 58.5% 2,328 2,999 28.8%
Net profit margin (%) 7.8% 10.2%   11.7% 12.6%  
No. of shares (m) 42 42   42 42  
Diluted earnings per share (Rs)*         71.3  
Price to earnings ratio (x)*         28.0  
*trailing twelve months

What has driven performance in 4QCY10?
  • The company witnessed strong sales growth in 4QCY10 on the back of robust volume growth in Horlicks and Boost. This comes on the back of new product innovations and higher spending towards brand building.

    Cost break-up
    As a % of sales 4QCY09 4QCY10 CY09 CY10
    Raw material 32.6% 34.0% 36.0% 36.4%
    Staff costs 10.9% 11.6% 10.1% 9.7%
    Advertisement costs 19.9% 17.1% 15.2% 15.6%
    Other expenditure 24.7% 22.9% 19.9% 19.6%

  • The company operating income grew by 45.2% YoY. This is due to slower growth in staff costs, advertisement costs and other expenditure as compared to sales. Staff costs grew by 11.6% YoY while advertisement and other expenditure grew by 17.1% YoY and 22.9% YoY respectively. However, higher raw material costs played spoilsport, increasing by 36% YoY and capping operating income growth.

  • Net profit grew by 58.5% YoY during the quarter. This was a result of growth in operating income, higher other income and lower interest expense partly offset by higher effective tax rate. The effective tax rate increased from 28.8% in 4QCY09 to 33.3% in 4QCY10.

What we expect?
At Rs 1,993, the stock is trading at 23.9 times our estimated CY12 earnings. The company's products have been facing good traction with biscuits growing quite sharply. The company's newly launched noodles 'Foodles' have garnered a market share of 4% in the east India markets in addition to 5% in south India markets. The company also stands to benefit from its flagship brands as the market is still largely under penetrated, allowing good head room for growth. Given the company's potential for growth, we believe this is a good stock for long term investment. However, high food inflation can be a dampener for the company's growth. Nevertheless, given the high price of the stock, we believe that valuations are expensive and advice 'CAUTION' on this stock.

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