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GSK Cons.: Margins improve on higher offtake - Views on News from Equitymaster
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GSK Cons.: Margins improve on higher offtake
Feb 12, 2015

GSK Consumer Healthcare Ltd has announced third quarter results of financial year 2014-15(3QFY15) results. The company has reported a 16% YoY growth in sales and 21% YoY rise in net profits. Here is our analysis of the results

Performance summary
  • GlaxoSmithKline Consumer Healthcare (GSKCH) posted a revenue growth of 16.5% YoY in 3QFY15 led by 11% YoY higher realizations.
  • Operating margin improved slightly as savings in input costs and other expenses were partially offset by higher ad-spends (all as a proportion of sales).
  • Net profits grew by 20.9% YoY aided by 20% YoY rise in operating profit and 23% YoY increase in other income.
  • The company had changed its accounting year from December to March in the previous financial year FY14. However since the results are available for 12 months ended December 2013 (CY13), the performance for 9mFY15 cannot be compared.

Standalone Financial Snapshot
Rs(m) 3QFY14 3QFY15 Change
Revenue 8,690 10,125 16.5%
Expenditure 7,806 9,066 16.1%
Operating profit (EBDITA) 884 1,059 19.8%
EBDITA margin (%) 10.2% 10.5% 0.3%
Other income 446 548 23.0%
Interest 4 2 -56.8%
Depreciation 112 131 17.2%
Profit before tax 1,213 1,474 21.5%
Extraordinary inc/(exp) - -  
Tax 416 510 22.6%
Profit after tax/(loss) 798 964 20.9%
Net profit margin (%) 9.2% 9.5% 0.3%
No. of shares (m)     42
Diluted earnings per share (Rs)*     129
Price to earnings ratio (x)*     44.41
*trailing twelve months

What has driven performance in 3QFY15?
  • GSKCH posted a 16.5% topline growth driven by 11% higher realizations and 5% volume growth. Offtake improved to 5% as compared to 2% volume growth in the preceding quarter. The Health Food Drinks (HFD) segment gained 1.2% market share with base Horlicks recording gain of 0.5% whereas Women's Horlicks gaining 0.5% in market share. Oats that grew by 25% in value terms, gained 6.1% share as compared to last year and became the second largest player in South India. The company re-launched Junior Horlicks during the quarter.

  • The operating margin improved by a mere 0.3% due to a 32% jump in ad-spends during the quarter. As a proportion of sales, ad-spends were up by 2.6% YoY. The impact was partially neutralized by input costs and staff costs that were down by 1.8% and 1.1% (both as a proportion of sales).

  • The net profits grew by 20.9% YoY on a 19.8% increase in operating profit coupled with 23% rise in other income earned. The tax incidence increased to 34.6% in 3QFY15 from 34.3% in 3QFY14.

    Cost break-up
    As a % of sales 3QFY14 3QFY15 Change in basis points
    Cost of goods sold 35.3% 33.5% -176.70
    Staff costs 9.5% 8.4% -114.68
    Advertisement costs 19.0% 21.5% 257.12
    Other expenditure 26.1% 26.1% 5.67
What to expect?
GSKCH has witnessed improvement in volume growth backed by strong performance of Horlicks portfolio. The company has been re-launching Horlicks and its variants with new packaging and greater market activation that has resulted in higher volume growth in December 2014 quarter. The company is also expanding its distribution reach and hopes to add 1 m outlets to its network in the next 12-18 months.

We had given a Sell on the stock. At a price of Rs 5722, the stock is trading at 32 times our estimated FY17 earnings.

At current price levels, the stock remains overpriced and we re-iterate that investors do not buy the stock at current price levels.

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