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GSK Cons.: High base effect moderates growth - Views on News from Equitymaster

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GSK Cons.: High base effect moderates growth
May 3, 2011

GSK Consumer Healthcare Ltd has announced first quarter results of financial year 2010-2011(1QCY11) results. The company has reported a 9.5% YoY and 15% YoY growth in sales and net profits respectively. Here is our analysis of the results

Performance summary
  • The company has seen subdued increase of 9.5% YoY in sales.
  • Operating (EBITDA) margins for the company remained flat at 22.4% (as a percentage of sales) for the quarter.
  • Bottom line for the quarter grew by 15% YoY on the back of higher operating income and increase in other income.


Rs(m) 1QCY10 1QCY11 Change
Net sales 6,640 7,274 9.5%
Expenditure 5,154 5,647 9.6%
Operating profit (EBDITA) 1,487 1,627 9.4%
EBDITA margin (%) 22.4% 22.4%  
Other income 80 166 108.0%
Interest 6 7 15.8%
Depreciation 96 109 14.2%
Profit before tax 1,465 1,677 14.5%
Extraordinary inc/(exp) - -  
Tax 503 571 13.4%
Profit after tax/(loss) 962 1,106 15.0%
Net profit margin (%) 14.5% 15.2%  
No. of shares (m) 42 42  
Diluted earnings per share (Rs)*   74.7  
Price to earnings ratio (x)*   31.0  
*trailing twelve months

What has driven performance in 1QCY11?
  • The company witnessed subdued sales this quarter. This was due to strong growth consistently shown in the same quarter the last few years which has resulted in a high base effect.

    Cost break-up
    As a % of sales 1QCY10 1QCY11
    Raw material 38.6% 37.1%
    Staff costs 7.8% 8.6%
    Advertisement costs 14.8% 14.2%
    Other expenditure 16.5% 17.7%

  • The company operating income grew by 9.4% YoY. This is in line with the top line growth. During the quarter increase in staff costs and other expenditure was balanced by fall in raw material costs and advertisement spending (all as a percentage of sales). While staff costs increased by 21% YoY, other expenditure increased by 17.5% YoY. Raw material costs on the other hand grew by 5.5% YoY while advertisement costs increased by 5.4% YoY.

  • Net profit grew by 15% YoY during the quarter. This was a result of growth in operating income, and higher other income and a marginal fall in effective tax rates. While other income more than doubled during the quarter to stand at Rs 166 m, effective tax rate fell from 34.4% in 1QCY10 to 34% during the current quarter.

What to expect?
At Rs 2,315, the stock is trading at 22 times our estimated CY13 earnings. While the company had a tepid quarter, we believe that underpenetrated market and entry into new categories will provide the company with growth triggers. Given the company's potential for growth, we believe this is a good stock for long term 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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