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GSK Consumers: A mixed year! - Views on News from Equitymaster

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GSK Consumers: A mixed year!
Feb 5, 2007

Performance summary
Malted beverage major, GSK Consumers (GSK) had announced its results for the fourth quarter and full year ended December 2006 (January-December fiscal) last week. The company reported a 15% YoY growth in net sales for CY06. The pressure on operating margins for both the periods under review continued due to higher raw material costs. Despite this, bottomline growth outpaced topline growth during the quarter due to higher other income and a considerably lower tax outgo.

Rs m 4QCY05 4QCY06 Change CY05 CY06 Change
Gross sales 2,684 2,888 7.6% 10,890 12,142 11.5%
Less : excise duty 261 241 -7.5% 1,222 1,023 -16.3%
% of sales 9.7% 8.3%   11.2% 8.4%  
Net sales 2,424 2,647 9.2% 9,669 11,119 15.0%
Expenditure 2,041 2,372 16.2% 7,827 9,274 18.5%
Operating profit 383 275 -28.1% 1,842 1,845 0.2%
Operating margins (%) 15.8% 10.4%   19.0% 16.6%  
Other Income 76 169 122.1% 243 522 114.7%
Interest (net) 9 8 -14.0% 42 35 -17.1%
Depreciation 107 108 1.2% 419 427 2.0%
Profit before Tax 343 328 -4.3% 1,624 1,905 17.3%
Tax 129 76 -41.0% 553 636 15.1%
Profit after Tax/(Loss) 214 252 17.8% 1,072 1,269 18.4%
Net profit margin (%) 8.8% 9.5%   11.1% 11.4%  
No. of Shares (m) 42.1 42.1   42.1 42.1  
Diluted Earnings per share (Rs)*         30  
Current P/e ratio         19.5  
*12 months trailing earning

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 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 the oral care segment and ‘Eno’, ‘Iodex’ and ‘Crocin’ in the OTC segment.

What has driven performance in CY06?
Volumes drive topline: GSK Consumer recorded a 9% YoY and 15% YoY growth in net sales during 4QCY06 and CY06 respectively driven by strong volume growth in Horlicks and Boost. The topline performance for the year is in line with our expectations. As regards Horlicks and Boost, while the volumes for the quarter grew by 4% YoY, the full year witnessed an 8% YoY growth. In order to offset the rise in input prices, the company has undertaken a 5% price increase in Horlicks and a 2% price hike in Boost (in November) resulting in an average price increase of 4.5%. Biscuits category grew by 11% YoY during the year. The company continued to enjoy 72% market share both in volumes and value for the year. Exports accounted for 5% of the total sales and are expected to remain at the same level going forward. The management expects revenues for CY07 to grow at a double digit pace.

Cost break-up
As a % of net sales 4QCY05 4QCY06 CY05 CY06
Total Cost of goods 29.9% 33.6% 32.7% 34.6%
Staff Cost 12.8% 15.3% 11.8% 12.1%
Advertising 14.9% 12.7% 13.1% 12.9%
Other Expenditure 26.6% 28.0% 23.4% 23.9%

Raw material costs dent margins: Operating margins for both the periods under consideration have contracted due to unprecedented higher raw material prices. While milk prices increased by 16% YoY for the year, prices of other key raw materials like malted barley, wheat, sugar, coco powder etc. also remained firm during the year. The management expects the raw material prices to increase further during the year. Advertising costs are expected to remain steady at the current levels of 13% going forward.

Higher other income drives bottomline growth: Despite the fall in the operating margins, net profits for both the periods under consideration outpaced the topline growth. Other income (including cross charge of Rs 70 m per quarter received on account of OTC products sold on behalf of GlaxoSmithkline Pharmaceuticals Ltd) aided the net profits. Lower interest costs and tax expenses further helped matters.

Performance in the year
( %) 1QCY06 2QCY06 3QCY06 4QCY06
Sales growth (YoY) 24.2 10.7 16.5 9.2
OPM 21.7 17.2 17.5 10.4
NPM 12.5 11.5 12 9.5

What to expect?
At the current price of Rs 589, the stock is trading at a price to earnings multiple of 19.5 times its 12-month trailing earnings. The company is expected to face pressure on the margin front going forward. However, the company’s volume growth has been strong and it expects revenues to grow at a double-digit rate going forward. The company is actively looking at any suitable inorganic growth opportunity mainly in the nutritional space, which will enable it to increase its revenues. However, one needs to be cautious on the valuation front.

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