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GSK Cons.: Robust sales but margins squeeze - Views on News from Equitymaster

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GSK Cons.: Robust sales but margins squeeze

Feb 9, 2012

GSK Consumer Healthcare Ltd has announced fourth quarter results of calendar 2011(4QCY11) results. The company has reported a 18.6% YoY and 43.6% YoY growth in sales and net profits respectively. Here is our analysis of the results

Performance summary
  • Sales grew by 18.6% YoY driven by 11% volume growth. During CY11, the topline increased by 16.5%.
  • Steep rise of over 20% YoY in the advertisement spends and other expenditure led to a relatively muted growth of 12.7% YoY in operating profit. As a result operating margin contracted by 80 basis points to 13.5% during the quarter. In CY11, operating profit was down by 30 basis points to 18.4%.
  • Earnings grew by tepid 10.7% due to slower rise in operating profits and a 43.6% jump in tax outgo on a YoY basis. For CY11, net profit grew by a robust 18.5% aided by a 60% rise in other income.

Financial snap-shot
Rs(m) 4QCY10 4QCY11 Change CY10 CY11 Change
Revenue 5,242 6,248 19.2% 23737.5 27706.8 16.7%
Expenditure 4,493 5,404 20.3% 19294 22605.5 17.2%
Operating profit (EBDITA) 749 844 12.7% 4,444 5,101 14.8%
EBDITA margin (%) 14.3% 13.5%   18.7% 18.4%  
Other income 167 259 55.1% 497.6 795.8 59.9%
Interest 7 9 29.4% 26 34.7 33.5%
Depreciation 109 121 10.9% 397.1 459.8 15.8%
Profit before tax 800 973 21.7% 4,518 5,403 19.6%
Extraordinary inc/(exp) - -   - -  
Tax 266 382 43.6% 1519.5 1850.5 21.8%
Profit after tax/(loss) 534 591 10.7% 2,999 3,552 18.5%
Net profit margin (%) 10.2% 9.5%   12.6% 12.8%  
No. of shares (m)         42  
Diluted earnings per share (Rs)*         84  
Price to earnings ratio (x)*         31.15  
*trailing twelve months

What has driven performance in 4QCY11?
  • GSK Consumer Healthcare (GSKCH) clocked an 18.6% rise in sales led by 11% higher offtake. Its mainstay health food drinks (HFD) segment recorded 12% growth in offtake. Its core brand Horlicks recorded 23% rise on volume growth of 16%. Boost saw a slower 2% rise in volumes on a high base. Biscuit sales grew by 29% backed by 15% higher volumes. Oats, which have been recently launched, have been well received and reached the 2nd and 3rd positions in Tamil Nadu and Kerala markets respectively Exports, comprising 8% of overall sales, witnessed a 42% jump in volumes aided by strong growth in intake by Bangladesh.

  • The operating profitability of the company has been hit by sharp rise in advertisement and other expenditure. These expenses, as a proportion of sales, increased by 120 basis points and 106 basis points respectively during the quarter. Barring wheat flour and sugar, other inputs such as malted barley and SMP continued to rule higher on a YoY basis. The cost of goods sold to sales ratio was marginally up by 24 basis points. Only the proportion of staff costs in sales dropped by 174 basis points during the quarter. As a result operating margin contracted by 80 basis points during the quarter.

  • GSKCH's earnings grew by a tepid 10.7% due to slower rise in operating profits and a 43.6% jump in tax outgo. The tax outgo includes prior-period tax incidence of Rs 55 m on disallowed employment retirement costs. Other income, including the business auxillary commission from the sale of Iodex, Eno, Crocin & Sensodyne, grew by 55% during the quarter.

    Cost break-up
    As a % of sales 4QCY10 4QCY11 Change in basis points
    Cost of goods sold 34.0% 34.3% 24.46
    Staff costs 11.6% 9.9% -174.07
    Advertisement costs 17.1% 18.3% 120.73
    Other expenditure 23.0% 24.1% 106.42

What to expect?
At a price of Rs 2,631, the stock is trading at 24 times our estimated CY13 earnings.

GSKCH, which has been deriving more than 90% of its revenues from one segment viz. health food drinks, is beginning to witness slowdown in its topline. Thus after growing at an average rate of 20% during the past three years (2007-10), the growth tapered off to 16.5% in CY11. Of the new segments entered by the company, biscuits have been growing at a robust pace but they still contribute a mere 5% to overall sales. In case of noodles, the company wants to sort out the supply chain issues and revamp the cost structure. The company has no strategy for the re-launch of nutribar that did not succeed earlier. Thus, as GSKCH continues to primarily rely on HFD and as long as it is not able to diversify into other segments substantially, its growth potential appears limited. Moreover its margins have come under pressure due to higher raw material costs and promotional spends. A&P spends will continue to remain high as the company expands distribution network and aggressively promotes new products. Therefore the current valuations appear stretched and we advice 'CAUTION’ on this stock.

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