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GSK Consumer: Looking for malt… - Views on News from Equitymaster
 
 
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  • Apr 1, 2003

    GSK Consumer: Looking for malt…

    GSK Consumer, which dominates the Rs 13 bn Indian malted beverage market with over 65% share, seems in deep trouble, going by the hammering the stock has received in FY03. The stock lost over 43% of its market cap in the last one year. We take a look at the reasons behind this, and try and gauge whether this will continue.

    In the last 11 years, GSK Consumer has grown from a size of Rs 2,003 m in 1991 to Rs 9,924 m in 2001, a CAGR of 17%. Similarly, profits of the company have clocked a CAGR of 19% to touch Rs 2,081 m in the same period. What is important to note here that in this period, GSK Consumer always grew revenues in double digits, the same is largely the case with profits.

    (Rs m) 1991 2001 CAGR (%)
    Sales 2,003 9,924 17.4%
    Operating profit 336 2,081 20.0%
    Net profit 228 1,267 18.7%
    OPM (%) 16.8% 21.0%  
    NPM (%) 11.4% 12.8%  

    However, 2002 has been the ‘annus horribilus’ for the malted beverage major, where it reported a 10% dip in topline and finished the year with a significant 35% dip in bottomline. The company blamed a large part of this decline in revenues to ‘inventory correction’, as well as due to delay in commissioning of the new plant in Sonepat. However, investors were not convinced by the explanation and consequently, one saw the unprecedented hammering of the stock on the bourses.

    The new 26,000 tonne plant at Sonepat has not been fully utilised. The higher depreciation also took a toll on profitability. In an investor’s conference call, the management clarified primary sales for the year were down 12.5% but secondary sales were down only 3%, thus indicating that the dip in sales was an inventory clean up. The company also said that it was facing consumer resistance when the price of Horlicks was increased beyond the round figure mark of Rs 100 (or Rs 200) for different size packs.

    The company no doubt will paint a better picture after the inventory correction is complete. Till then, investor confidence towards the stock would remain lacklustre. The company’s malted beverages focus with only Horlicks, Boost, Viva and Maltova makes it prone to the vagaries of being a single product company. This reminds you of the problem Colgate faces as a single product company. Already, GSK Consumer’s advertisement to sales ratio has creeped up from around 9% levels to nearly 14% in the December quarter 2002. The ad spend is likely to see a further increase in FY04.

    However, all said and done, GSK Consumer still continues to hold onto its over 65% market share in the malted beverage industry. The company is still zero debt and plans to look at the cold beverages market and up its thrust on the north and western India. At Rs 222, the stock trades at 10x our expected 2003 earnings for the company, market cap to sales of 1.2x.

     

     

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