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GSK Cons.: Margins remain staid
Feb 19, 2014

GSK Consumer Healthcare Ltd has announced fourth quarter results of calendar 2013(4QCY13) results. The company has reported a 18% YoY growth in sales and 14.5% YoY rise in net profits. Here is our analysis of the results

Performance summary
  • Led by 13% volume growth, topline grew by 18% in 4QCY13. For CY13, revenues grew by 17.6%.
  • The operating margin declined slightly due to steep rise in input costs and ad-spends. During CY13, operating margin contracted by 0.8%.
  • Net profit grew by a relatively slower 14.5% YoY due to higher depreciation and tax outgo. For CY13, net profits increased by 15.2% YoY.

Rs(m) 4QCY12 4QCY13 Change CY12 CY13 Change
Revenue 7,345 8,690 18.3% 31,875 37,488 17.6%
Expenditure 6,581 7,806 18.6% 26,141 31,060 18.8%
Operating profit (EBDITA) 764 884 15.7% 5,734 6,428 12.1%
EBDITA margin (%) 10.4% 10.2% -0.2% 18.0% 17.1% -0.8%
Other income 351 446 26.9% 1,138 1,589 39.7%
Interest 1 4 214.3% 24.2 8.8 -63.6%
Depreciation 79 112 41.6% 360.8 456.8 26.6%
Profit before tax 1,035 1,213 17.2% 6,487 7,551 16.4%
Extraordinary inc/(exp) - -   - -  
Tax 338 416 22.9% 2,119 2,521 18.9%
Profit after tax/(loss) 697 798 14.5% 4,368 5,031 15.2%
Net profit margin (%) 9.5% 9.2% -0.3% 13.7% 13.4% -0.3%
No. of shares (m)         42  
Diluted earnings per share (Rs)*         120  
Price to earnings ratio (x)*         36.79  
*trailing twelve months

What has driven performance in 4QCY13?
  • The company posted an 18% increase in revenues led by 13% volume growth and 5% higher realizations. Domestic revenues, forming 89% of overall revenues, grew by 16% led by 11% higher offtake. Exports registered an increase in 36% during the quarter. Product wise, Health Food Drinks and Packaged foods grew by 17% YoY and 29% YoY respectively. The company has launched Horlicks in Kesar badam flavour during the quarter.

  • However, robust turnover could not boost operating performance due to high commodity inflation. High inflation in milk and milk powders pulled up cost of goods-to sales ratio to 35.3% in 4QCY13 compared to 32.8% in the 4QCY12. Even high investments behind brands saw a 0.9% increase in adspends-to-sales ratio for the quarter. The impact was offset by savings in staff costs and other expenses (both as a proportion of sales). The operating margin dipped slightly by 0.2% during the quarter.

  • Net profits grew by a relatively slower 14.5% on a 15.7% rise in operating profit on account of higher depreciation and tax outgo. The tax incidence increased to 34.3% in 4QCY13 from 32.7% in 4QCy12. The other income comprising of business auxiliary income and interest income grew by 27% during the quarter.

    Cost break-up
    As a % of sales 4QCY12 4QCY13 Change in basis points
    Cost of goods sold 32.8% 35.3% 251.76
    Staff costs 10.7% 9.5% -116.62
    Advertisement costs 18.1% 19.0% 90.10
    Other expenditure 28.1% 26.1% -202.22
What to expect?
GSKCH has been clocking robust growth in offtake, thanks to strong brand equity of Horlicks. Even its packaged foods business has been growing at a brisk pace backed by good growth in oats business. However high brand investments have kept profit margins under pressure.

We had given a Sell on the stock. At a price of Rs 4400, the stock is trading at 24 times our estimated CY14 earnings.

At current price levels, the stock remains overpriced and we re-iterate a SELL on the stock.

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