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GSK Cons.: Profit growth remains robust - Views on News from Equitymaster
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GSK Cons.: Profit growth remains robust
Feb 19, 2013

GSK Consumer Healthcare Ltd has announced fourth quarter results of calendar 2012(4QCY12) results. The company has reported a 18% YoY growth in each of sales and net profits. Here is our analysis of the results

Performance summary
  • The topline increased by 18.6% in 4QCY12. For CY12, revenues grew by 15%.
  • A steep rise in other expenditure offset cost savings in raw material and ad-spends translating in a 2.4% contraction in operating margin during 4QCY12. The operating margin for CY12 remained flat at around 18%.
  • Backed by lower depreciation and tax charges, net profit grew by 18% in 4QCY12. For CY12, net profits surged by 23%.

Standalone Financial Snapshot
Rs(m) 4QCY11 4QCY12 Change CY11 CY12 Change
Revenue 6,194 7,345 18.6% 27650.1 31875 15.3%
Expenditure 5,404 6,581 21.8% 22605.5 26140.9 15.6%
Operating profit (EBDITA) 790 764 -3.3% 5,045 5,734 13.7%
EBDITA margin (%) 12.8% 10.4%   18.2% 18.0%  
Other income 313 351 12.2% 852.5 1137.9 33.5%
Interest 9 1 -84.1% 34.7 24.2 -30.3%
Depreciation 121 79 -34.6% 459.8 360.8 -21.5%
Profit before tax 973 1,035 6.3% 5,403 6,487 20.1%
Extraordinary inc/(exp) - -   - -  
Tax 382 338 -11.5% 1850.5 2119.3 14.5%
Profit after tax/(loss) 591 697 17.9% 3,552 4,368 23.0%
Net profit margin (%) 9.5% 9.5%   12.8% 13.7%  
No. of shares (m)         42  
Diluted earnings per share (Rs)*         104  
Price to earnings ratio (x)*         36.90  
*trailing twelve months

What has driven performance in 4QCY12?
  • GSK Consumer Healthcare (GSKCH) registered an 18.6% rise in topline.

  • However, the robust sales growth has not percolated into incremental margins due to a steep rise in other expenses. Other expenditure to sales ratio shot up by 3.8% to 28.1%. This has offset savings of 1.8% and 0.4% in raw material and ad-spends respectively, both as a proportion of sales. The operating margin contracted by 2.4% to 10.4% for the quarter.

  • Net profit clocked a sharp rise of 18% aided by lower depreciation and tax outgo. The tax incidence dropped to 32.7% from 39.3% in the year-ago quarter.

    Cost break-up
    As a % of sales 4QCY11 4QCY12 Change in basis points
    Cost of goods sold 34.6% 32.8% -179.36
    Staff costs 10.0% 10.7% 71.93
    Advertisement costs 18.4% 18.1% -36.97
    Other expenditure 24.3% 28.1% 379.22

What to expect?
At a price of Rs 3,832, the stock is trading at 27 times our estimated CY14 earnings.

GSKCH has not been able to diversify its business model with Health Food Drinks (HFD) still contributing more than 90% to overall revenues. Its recent foray into biscuit and noodles still forms less than 7% of sales. Moreover, both these segments are extremely competitive. Even in its mainstay HFD business, the company is witnessing headwinds. Recently, the Food Safety Standards of India (FSSAI) has issued notice to the company for misleading consumers about health benefit claims made without proper back-up with scientific data. GSKCH has been asked by FSSAI to take its Horlicks and Boost brands off the shelf until it proves claims of rapid growth in height and intelligence that is being promoted by its brands.

We had given a Sell on the stock. At current levels, the stock appears overpriced and we re-iterate a SELL on the stock.

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