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SBCH: Feels the heat - Views on News from Equitymaster
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  • Apr 22, 2002

    SBCH: Feels the heat

    FMCG sector continues to feel the heat of an economic slowdown. This is reflected in the slowing revenue growth of SmithKline Beecham Consumer Healthcare (SBCH). The company's turnover in the March quarter hardly saw any growth, compared to a 13.5% rise recorded in FY02. Although, it managed to improve operating margins, deferred taxes pressurized earnings.

    (Rs m) 1QFY02 1QFY03 Change FY02 Change
    Net Sales 1,847 1,855 0.4% 8,353 13.5%
    Other Income 83 41 -51.0% 363 25.6%
    Expenditure 1,465 1,395 -4.8% 6,569 10.4%
    Operating Profit (EBDIT) 381 460 20.5% 1,784 26.6%
    Operating Profit Margin (%) 20.6% 24.8%   21.4%  
    Interest 24 3 -87.8% 71 61.5%
    Depreciation 33 34 3.0% 136 -0.2%
    Profit before Tax 408 463 13.7% 1,940 27.8%
    Tax 122 169 38.2% 639 60.9%
    Profit after Tax/(Loss) 285 294 3.2% 1,301 16.1%
    Net profit margin (%) 15.5% 15.9%   15.6%  
    No. of Shares 45.4 45.4   45.4  
    Diluted Earnings per share* 25.2 25.9   28.7  
    P/E Ratio   15.3   13.9  

    The company's revenues, in fact, have shown a steady decline in the last 3 quarters. In October quarter turnover growth stood at 9%, in December quarter the growth slid to 8.2% YoY and now a negligible growth in topline. In the first half of FY02 the company had recorded a healthy 21% growth in topline. With increasing competition ('Bournvita' from Cadbury and 'Maltova' from Nestle) and sluggish demand, revenue growth has been impacted.

    Infact, the gross sales (value terms) decreased by 3.2% during the quarter ended March 31, 2002. The company's management attributes it to adverse economic environment leading to continued demand recession.

    However, SBCH's operating margins continue to rise on the back of its cost control initiatives. The consumption of raw material, as a proportion to sales, declined to 33.3% in 1QFY03 from 40.1% in the comparable previous period. The company also managed to reduce its advertising to sales ratio to 9.0% from 10.3% in 1QFY02. Overall operating efficiencies aided SBCH in improving operating profits by 20.5% during the quarter.

    Expenses as a % of sales
    (Rs m) 1QFY02 1QFY03 FY02
    Stock -5.3% -1.1% 0.4%
    Raw material consumption 40.1% 33.3% 34.2%
    Finished goods 0.9% 0.6% 0.7%
    Staff cost 9.0% 10.4% 8.5%
    Advertisment cost 10.3% 9.0% 8.7%
    Other expenses 24.3% 23.0% 26.2%

    The company would have declared higher net profits if it had not been for higher tax provisions due to deferred tax. A significant 51% dip in the company's other income was also responsible for the depressed earnings.

    At the current market price of Rs 397, SBCH is trading at a P/E of 15x 1QFY02 annualised earnings. Although, its P/E multiple is lower compared to its FMCG peers, the company's market cap to sales ratio of 2.4x is more or less comparable to other food majors.



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