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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)1QFY031QFY04ChangeFY03YoY Change
Net Sales1,8551,817-2.0%7,525-9.9%
Other Income4139-4.2%146-59.7%
Expenditure1,3951,4675.2%6,026-8.3%
Operating Profit (EBDIT)460350-23.9%1,498-16.0%
Operating Profit Margin (%)24.8%19.2% 19.9% 
Interest 32-17.2%24-66.6%
Depreciation3491168.7%25788.6%
Profit before Tax463295-36.3%1,364-29.7%
Tax16999-41.6%453-29.2%
Extraordinary items0-15--61-
Profit after Tax/(Loss)294182-38.3%850-34.6%
Net profit margin (%)15.9%10.0% 11.3% 
No. of Shares 45.445.4 45.4 
Diluted Earnings per share*25.916.0 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 sales1QFY031QFY04
Stock-1.1%2.9%
RM33.3%31.5%
Finished goods0.6%0.9%
Staff cost10.4%10.9%
Advt.9.0%10.5%
Other exps21.7%22.0%
Patent and trademark0.7%1.3%
Def. Rev. exps.0.7%0.7%
Total75.2%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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