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SBCH: Time for re-rating? - Views on News from Equitymaster
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  • Feb 16, 2001

    SBCH: Time for re-rating?

    In these days of old economy boom, FMCG companies too have gained considerable ground. But the same does not hold true for malted beverages major, Smithkline Beecham Consumer Healthcare (SBCH). Let's take a look.

    In the last three months, the SBCH stock has remained perched where it was (at around Rs 415 levels). The reasons for this are not hard to find. In the company's fourth quarter, topline growth slowed down to 5% YoY. As a result, its operating margins fell by 270 basis points in FY01.

    SBCH is one of the few FMCG companies to show double digit growth in turnover on an annualised basis. The company's performance would have been much better but for its relatively poor 4QFY01 performance. The 4QFY01 performance also signals that the slowdown in consumption has started nagging SBCH.

    (Rs m) FY00 FY01 Change
    Net Sales 7,208 8,583 19.1%
    Total expenditure 5,836 7,181 23.0%
    Operating Profit (EBDIT) 1,372 1,402 2.2%
    Operating Profit Margin (%) 19.0% 16.3%  
    Interest 46 61 32.6%
    Depreciation 113 142 25.7%
    Profit before Tax 1,383 1,544 11.6%
    Tax 407 398 -2.2%
    Profit after Tax/(Loss) 976 1,146 17.4%
    Net profit margin (%) 13.5% 13.4%  
    No. of Shares (eoy) (m) 45.4 45.4  
    Earnings per share* 21.5 25.2  
    Current P/e ratio   16.6  

    There were other reasons for the company's low profitability. A zero debt company till last year, Smithkline raised debt to fund the ongoing capex programme and brand takeovers, as a result of which interest costs saw a sharp increase.

    Smithkline strengthened its dominating position in the malted beverages segment with the acquisition of Viva and Maltova brands from Jagatjit Industries. The company is spending Rs 2.4 bn on a new plant (26,000 tonnes per annum) to manufacture 'Horlicks' (its main brand). This will enable it in overcoming a potential capacity constraint in the future. Moreover steps are being taken to increase capacity at its existing plant by 6,000 tonnes per annum. Productivity levels are expected to improve substantially as the new plant is based on the latest available technology. However, the profitability of the company is getting adversely affected, as it will not be able to capitalise the expenditure.

    But it must be added that SBCH will act as a sourcing base for malted food drinks for the parent company’s other Asian markets once the expanded capacity is commissioned. Horlicks exports will thereafter aid volume growth.

    At the current levels, the SBCH stock quotes at a P/e multiple of 16.6 times its FY01 earnings. Given SBCH's consistent track record, the company will more likely than not emerge stronger after the capacity expansion. It therefore has a good chance of a re-rating.



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