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GSK Consumers: Volume led growth! - Views on News from Equitymaster
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GSK Consumers: Volume led growth!
May 24, 2007

Performance summary
Malted beverage major, GSK Consumers (GSK) announced its results for the first quarter ended March 2007 (January-December fiscal). The company reported an 18% YoY growth in the topline for 1QCY07. On the back of higher staff and other costs, operating margins declined by almost 190 basis points for the quarter. The bottomline (up 22.6% YoY) for the quarter grew faster than the operating profits on the back of a higher other income and lower depreciation charges.

(Rs m) 1QCY06 1QCY07 Change
Net sales 2,759 3,265 18.3%
Expenditure 2,179 2,641 21.2%
Operating profit 580 624 7.6%
Operating margins (%) 21.0% 19.1%  
Other Income 72 139 93.1%
Interest (net) 7 11 57.1%
Depreciation 105 108 2.9%
Profit before Tax 540 644 19.3%
Tax 195 221 13.3%
Profit after Tax/(Loss) 345 423 22.6%
Net profit margin (%) 12.5% 13.0%  
No. of Shares (m) 42.1 42.1  
Diluted Earnings per share (Rs)*   32.0  
Current P/e ratio   16.9  
*(annualised)      

What is the company’s business?
GSK Consumers dominates the Rs 13 bn Indian malted beverage market with a significant 65% share (volume terms). Its white beverage brand ‘Horlicks’ has led the market growth of this sector in India and contributes around 80% to the company’s revenues. The company’s other brands include ‘Boost’, ‘Viva’ and ‘Maltova’. The company also earns 4-5% fees by marketing products for SmithKline Beecham Asia Pvt. Ltd, the parent’s 100% subsidiary. The subsidiary has well known brands like ‘Aquafresh’ in oral care segment, ‘Eno’, ‘Iodex’ and ‘Crocin’ in the OTC portfolio.

What has driven performance in 1QCY07?
Topline view: GSK has continued with the growth momentum in the quarter with an 18% YoY growth in the topline. ‘Horlicks’ and ‘Boost’ continued to fuel the sales growth. Also, the company’s focus on new products contributed to the strong performance. Going forward, we expect the performance to remain strong as it is focusing on investing in its core brands. Also, it has planned to acquire companies, which would fit in line with its long-term plans.

Cost break-up
As a % of net sales 1QCY06 1QCY07
Total Cost of goods 35.5% 35.7%
Staff Cost 9.5% 10.7%
Advertisement 14.5% 13.2%
Other Expenditure 19.5% 21.3%

Margin pressure evident: Operating margins continued to face pressure and declined by 190 basis points (1.9%) during the quarter. The fall was mainly due to higher labour and other expenses (as percentage of sales). The company also faced pressure on the input prices, which is expected to be a cause of concern going forward. With its Baddi plant accounting for a major part of its turnover, the company witnessed a reduction in excise costs.

Bottomline picture: Despite lower operating margins, the bottomline (up 22.6% YoY) has outperformed the growth in the topline led by the higher other income and lower depreciation charges. This has also resulted in a 50 basis points (0.5%) rise in the net margins.

What to expect?
At the current price of Rs 541, the stock is trading at a price to earnings multiple of 16.9 times its 12-month trailing earnings. The company has continued with its good topline performance and is investing aggressively in brands and extensions. Also, it has planned to acquire companies to fuel its long-term growth plans. Having said that, pressure on the operating margin front continues to remain a cause for concern. Also, valuations at the current levels appear stretched.

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