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GSK Cons.: Robust sales & margins sustained - Views on News from Equitymaster

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GSK Cons.: Robust sales & margins sustained

May 7, 2013

GSK Consumer Healthcare Ltd has announced first quarter results of calendar 2013(1QCY13) results. The company has reported a 16% YoY growth in sales and 19% YoY rise in net profits. Here is our analysis of the results

Performance summary
  • Driven by 17% growth in the domestic business, topline increased by 17%.
  • The operating margin contracted by 0.9% due to steep rise in ad-spends and staff costs.
  • Aided by reduction in depreciation charges coupled with lower tax incidence, net profits grew by a faster 18.5% during the quarter.

Standalone Financial Snapshot
Rs(m) 1QCY12 1QCY13 Change
Revenue 8,364 9,754 16.6%
Expenditure 6,514 7,691 18.1%
Operating profit (EBDITA) 1,851 2,063 11.5%
EBDITA margin (%) 22.1% 21.2%  
Other income 245 324 32.6%
Interest 12 1 -88.1%
Depreciation 119 107 -10.2%
Profit before tax 1,964 2,279 16.0%
Extraordinary inc/(exp) - -  
Tax 645 715 10.9%
Profit after tax/(loss) 1,320 1,564 18.5%
Net profit margin (%) 15.8% 16.0%  
No. of shares (m)   42  
Diluted earnings per share (Rs)*   110  
Price to earnings ratio (x)*   36.96  
*trailing twelve months

What has driven performance in 1QCY13?
  • Riding on 8% volume growth and 10% price-hike in Health Food Drinks (HFD), the company's domestic sales grew by 17%. Horlicks and Boost grew by 18% and 25%, respectively in value terms. Packaged Foods recorded growth of 25% during the quarter. However, a slower 5% rise in export turnover has led to a modest 17% growth in revenues during the quarter. The company has launched 'Horlicks PROMIND', a product aimed at enhancing cognition in children.

  • The operating profitability remained depressed due to a steep rise in ad-spends and staff costs. As innovative marketing campaigns were run for Horlicks, Boost and Women Horlicks during the quarter, ad-spends to sales ratio rose by 3.3% to 16% for the quarter. Even the proportion of staff costs to sales increased by 1.2%. The step-up in expenses was partially offset by a 3% savings in raw material costs to sales ratio. The operating margin contracted by 0.9% to 21.2% for the quarter.

  • At the net level, profits grew by a faster 18.5% due to fall in depreciation charges and a subdued rise in tax outgo. The tax incidence dropped to 31.4% from 32.8% in the year-ago quarter. The other income comprising of business auxiliary income and interest income grew by 33% during the quarter.

    Cost break-up
    As a % of sales 1QCY12 1QCY13 Change in basis points
    Cost of goods sold 39.5% 36.5% -300.46
    Staff costs 7.9% 9.1% 122.15
    Advertisement costs 13.0% 16.3% 328.24
    Other expenditure 17.4% 16.9% -52.46

What we expect?

Health Food Drinks (HFD) continue to remain GSKCH's main-stay business. The company has been extending this segment by launching more premium products targeted at enhancing memory and height. Although its packaged foods business has been registering strong growth, it still contributes less than 10% of overall sales. GSKCH is re-aligning the packaged foods portfolio on the health-food plank. The company has phased out its creams & cookies biscuits, but has retained the nutritious biscuits range under the flagship Horlicks brand. It has also exited out of the maida noodle segment that is more competitive and launched multi-grain noodles.

Backed by a successful launch of Sensodyne toothpaste and as part of its strategy to reach the Rs 80 bn revenue mark by 2016, GSKCH has signed a collaboration deal with its associate company, GSK Pharmaceuticals. As per the deal, the two companies will leverage on their marketing and distribution strengths to cross-sell products. GSKCH will initially sell GSK Pharma's Ostocalcium whereas the latter will sell the company's Actibase and Actigrow nutrition supplements. The company is also increasing its rural focus and wants to reach 40,000 villages by 2016. All these initiatives are expected to maintain sales momentum in future.

We had given a Sell on the stock. At a price of Rs 4055, the stock is trading at 29 times our estimated CY14 earnings.

At current price levels, the stock remains overpriced and we re-iterate a SELL on the stock.

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