GSK Consumer: Bad news continues - Views on News from Equitymaster

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GSK Consumer: Bad news continues

Apr 16, 2003

GlaxoSmithkline Consumer Healthcare Ltd. (SBCH) has posted a 38% dip in its 1QFY04 net profits. Though we do not have the company's detailed release on the results, as per the declared numbers, the company's gross sales has dipped by over 4% during the March quarter. The company has however, clarified that it has not lost market share in the malted beverage segment. With this, SBCH's poor showing continues.

(Rs m) 1QFY03 1QFY04 Change FY03 YoY Change
Net Sales 1,855 1,817 -2.0% 7,525 -9.9%
Other Income 41 39 -4.2% 146 -59.7%
Expenditure 1,395 1,467 5.2% 6,026 -8.3%
Operating Profit (EBDIT) 460 350 -23.9% 1,498 -16.0%
Operating Profit Margin (%) 24.8% 19.2%   19.9%  
Interest 3 2 -17.2% 24 -66.6%
Depreciation 34 91 168.7% 257 88.6%
Profit before Tax 463 295 -36.3% 1,364 -29.7%
Tax 169 99 -41.6% 453 -29.2%
Extraordinary items 0 -15 - -61 -
Profit after Tax/(Loss) 294 182 -38.3% 850 -34.6%
Net profit margin (%) 15.9% 10.0%   11.3%  
No. of Shares 45.4 45.4   45.4  
Diluted Earnings per share* 25.9 16.0   18.7  
P/E Ratio   14.4   12.3  
*(annualised)          

2002 was one of the worst years for the company wherein it reported a 9% dip in topline and nearly 35% dip in profits. Going by the March quarter results, 2003 has also started on a weak note. Though the topline dip is marginal and is a sign that the fall in revenues is getting arrested, it remains an area of concern. Operating margins for the company have dipped to 19.2%, almost a 5% fall in operating margins. This was mainly on account of higher advertising spending (10.5% of sales in 1QFY04 as compared to 9.0% last year).

A 14% hike in advertising revenues indicates the pressure on the company to maintain its growth. In 2002, the management had clarified that a lot of the de-growth in topline came as a consequence of an inventory correction. However, the pressure on topline continues. Being a single product focused company, this sort of degrowth in topline is very worrying, much like what has happened to Colgate. The stock has consequently, been hammered in the last one year.

Expenses as a % of sales 1QFY03 1QFY04
Stock -1.1% 2.9%
RM 33.3% 31.5%
Finished goods 0.6% 0.9%
Staff cost 10.4% 10.9%
Advt. 9.0% 10.5%
Other exps 21.7% 22.0%
Patent and trademark 0.7% 1.3%
Def. Rev. exps. 0.7% 0.7%
Total 75.2% 80.8%

At Rs 230, the stock trades at 14x annualised 1QFY04 earnings with market cap. to sales at 1.4x. Though the company's past growth track record is enthusing, we believe that it is moving towards a Colgate type fate unless it de-risks its product portfolio.


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