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GSK Cons.: Higher advertising affects profit
Apr 23, 2010

GSK Consumer Healthcare Ltd has announced its 1QCY10 results. The company has reported a 20% YoY and 14.6% YoY growth in sales and net profits respectively. Here is our analysis of the results

Performance summary
  • The company has seen strong sales with growth of 20% YoY for 1QCY10.
  • Operating (EBITDA) margins for the company fell by 1.7% in 1QCY10 to stand at 22.4%. This fall comes due to higher advertisement costs (as a percentage of sales) during the quarter.
  • Bottom line for the quarter grew by 14.6% YoY on the back of higher sales and lower tax expense. Net profit could have been higher but for higher advertisement costs and lower other income.


Rs(m) 1QCY09 1QCY10 Change
Net sales 5,537 6,640 19.9%
Expenditure 4,203 5,154 22.6%
Operating profit (EBDITA) 1,334 1,487 11.5%
EBDITA margin (%) 24.1% 22.4%  
Other income 108 80 -26.2%
Interest 12 6 -52.5%
Depreciation 106 96 -9.8%
Profit before tax 1,324 1,465 10.7%
Extraordinary inc/(exp) - -  
Tax 485 503 3.8%
Profit after tax/(loss) 839 962 14.6%
Net profit margin (%) 15.2% 14.5%  
No. of shares (m) 42 42  
Diluted earnings per share (Rs)*   58.3  
Price to earnings ratio (x)*   26.9  
*trailing twelve months

What has driven performance in 1QCY10?
  • The company witnessed strong sales growth in 1QCY10 on the back of robust volume growth in Horlicks and Boost. This comes on the back of new product innovations and higher spending towards brand building. Volume growth contributed 13% to sales while value growth contributed 5%. An additional 2% benefit was contributed by excise duty.

    Cost break-up
    As a % of sales 1QCY09 1QCY10
    Raw material 38.6% 38.6%
    Staff costs 9.0% 7.8%
    Advertisment costs 10.9% 14.8%
    Other expenditure 17.4% 16.5%

  • While lower staff costs and lower other expenditure as a percentage of sale fell during the quarter, operating income as a percentage of sales was lower due to higher spending on advertisement. Staff costs increased by 4% YoY during the quarter while other expenditure increased by 14% YoY. However, advertisement expense increased by 62% YoY due to brand building.

  • While net profit was higher during the quarter, net profit margin fell by 0.7% due to higher advertisement costs and lower other income. Net profit margin could have been lower but for fall in depreciation and lower effective tax rate during the quarter.

What to expect?
At Rs.1,565, the stock is trading at 24.6 times our estimated CY11 earnings. The company’s products have been facing good traction with biscuits growing at 20% YoY during the quarter. The company's newly launched noodles Foodles have garnering a market share of 4-5% in the South India markets. The company also stands to benefit from its flagship brands as the market is still largely under penetrated, allowing good head room for growth. The company has switched to e-banking for its financial transactions and this has resulted in savings on working capital. Given the company’s potential for growth, we believe this is a good stock for investment. However, high food inflation can be a dampener for the company’s growth. Nevertheless, given the high price of the stock we believe that valuations are expensive and advice 'CAUTION' on this stock.

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