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GSK Cons.: Operating margin under pressure - Views on News from Equitymaster
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GSK Cons.: Operating margin under pressure
May 9, 2012

GSK Consumer Healthcare Ltd. has announced first quarter results of calendar 2012(1QCY12) results. The company has reported a 15% YoY and 19% YoY growth in sales and net profits respectively. Here is our analysis of the results

Performance Summary
  • Sales grew by 15% YoY led by 8% higher realisations and 7% volume growth.
  • The company has barely been able to maintain its operating profitability at 22% due to a steep rise in cost of goods sold.
  • Earnings grew by a robust 19% on a 13.7% rise in operating profits.


Financial snapshot
Rs(m) 1QCY11 1QCY12 Change
Revenue 7,274 8,364 15.0%
Expenditure 5,647 6,514 15.3%
Operating profit (EBDITA) 1,627 1,851 13.7%
EBDITA margin (%) 22.4% 22.1%  
Other income 166 245 47.5%
Interest 7 12 78.8%
Depreciation 109 119 9.1%
Profit before tax 1,677 1,964 17.1%
Extraordinary inc/(exp) - -  
Tax 571 645 12.9%
Profit after tax/(loss) 1,106 1,320 19.3%
Net profit margin (%) 15.2% 15.8%  
No. of shares (m)   42  
Diluted earnings per share (Rs)*   90  
Price to earnings ratio (x)*   29.28  
*trailing twelve months

What has driven performance in 1QCY12?
  • Backed by 8% higher realisations and 7% rise in offtake, GSK Consumer Healthcare (GSKCH) clocked a 15% increase in topline. The slower growth in offtake was on account of stoppage of order placement by the ‘Canteen Stores Department' (CSD) for the months of February and March 2012 which affected sale volumes by 250 basis points. The mainstay health food drinks (HFD) segment grew by 8%. In this segment flagship brand, Horlicks, recorded an 8.5% increase in sales on 9.4% higher volumes. However, Boost offtake grew by a sluggish 2% during the quarter. In the non-HFD segment, with 8% share in overall sales, biscuits registered a steep growth of 31%.

  • The company's operating margin remained static on account of a faster rise in cost of goods sold. The quarter saw significantly higher drawdown of inventory as compared to the year-ago quarter. Prices of inputs such as barley and skimmed milk powder continued to rule higher by over 15% YoY. Consequently the cost of goods to sold ratio shot up to 39.5% from 37% in the year-ago quarter. However the impact has been partially neutralised by reduction in both staff costs and advertisement expenses (as a percentage of sales). GSKCH' operating margin lingered at around 22% during the quarter.

  • GSKCH clocked a 19.3% jump in earnings on a 13.7% rise in operating profit and modest increase in depreciation and tax expenses. Other income, including the business auxillary commission from the sale of Iodex, Eno, Crocin & Sensodyne, grew by 47.5% during the quarter.

    Cost break-up
    As a % of sales 1QCY11 1QCY12 Change in basis points
    Cost of goods sold 37.1% 39.5% 235.55
    Staff costs 8.6% 7.9% -68.57
    Advertisement costs 14.2% 13.0% -118.66
    Other expenditure 17.7% 17.4% -24.20

What to expect?
At a price of Rs 2722, the stock is trading at 19 times our estimated CY14 earnings.

GSKCH, a market leader in malted food drinks, has been diversifying into other product categories. Amongst them, biscuits and oats have been registering robust growth. But in both the categories, GSKCH is present majorly in the southern states and currently has insignificant market shares. The company's foray in noodles has been facing supply issues and is being re-configured. It would not be wrong to say that GSKCH depends totally on HFD with a share of 94% in overall sales. The company is facing increased competition in its core products which is likely to keep its advertisement & promotional spends high in future. The company has chalked out brownfield capacity expansion plans in HFD and will be spending Rs 2.5 bn and Rs1.5 bn in CY12 and CY13, respectively.

The stock appears overpriced at current valuations and we advice investors to exercise 'CAUTION'.

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