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GSK Cons.: Margin pressure continues
Jun 6, 2014

GSK Consumer Healthcare Ltd has announced fourth quarter results of financial year 2014(4QFY14) results. The company has reported a 15% YoY growth in sales and 10% YoY rise in net profits. Here is our analysis of the results

Performance summary
  • The company has posted a 15% topline growth aided by 7% volume growth and 8% higher realization.
  • The operating margin eroded by 0.6% due to a faster rise in input costs and ad-spends.
  • Net profits grew by 9.8% due to a sharp jump in depreciation and higher tax incidence.
  • The company has recommended a dividend of Rs 45 per equity share of the face value of Rs 10 each for the 15 months period ended 31st March 2014. The company wants to change its accounting year from January-December to April-March and so financials for the 15 months period have been released.

Standalone Financial Snapshot
Rs(m) 4QFY13 4QFY14 Change
Revenue 9,754 11,198 14.8%
Expenditure 7,691 8,898 15.7%
Operating profit (EBDITA) 2,063 2,300 11.5%
EBDITA margin (%) 21.2% 20.5% -0.6%
Other income 324 480 48.0%
Interest 1 2 21.4%
Depreciation 107 169 57.7%
Profit before tax 2,279 2,610 14.5%
Extraordinary inc/(exp) - -  
Tax 715 893 24.9%
Profit after tax/(loss) 1,564 1,717 9.8%
Net profit margin (%) 16.0% 15.3% -0.7%
No. of shares (m)     42
Diluted earnings per share (Rs)*     123
Price to earnings ratio (x)*     37.36
*trailing twelve months

What has driven performance in 4QFY14?
  • The company clocked a 15% revenue growth driven by 7% volume growth and 8% higher realizations in domestic sales. Domestic revenues constitute a lion's share of 92% of overall sales of the company. Product wise, health food drinks and packaged foods registered growths of 13% and 32%, respectively during the quarter.

  • But high commodity inflation continued to play spoilsport. Due to high inflation in milk and milk powders, the raw material cost to sales ratio rose by 0.8% during the quarter. Even higher brand investments led to 0.3% jump in ad-spends to sales ratio. Savings in staff costs and other expenditure partially neutralized the impact and operating margin eroded by 0.6% for the quarter.

  • Net profits grew by a relatively slower 9.8% on a 11.5% rise in operating profit due to higher depreciation and tax outgo. The tax incidence increased to 34.2% in 4QFY14 from 31.4% in 4QFY13. The other income comprising of business auxiliary income and interest income grew by 48% during the quarter. The business auxillary income derived from the distribution of Eno, Crocin, Iodex and oral care products increased by 14% during the quarter. Sales of Crocin Advance were particularly impacted by price reductions due to regulatory requirements as well as supply chain disruptions.

    Cost break-up
    As a % of sales 4QFY13 4QFY14 Change in basis points
    Cost of goods sold 36.5% 37.3% 82.01
    Staff costs 9.1% 9.0% -16.09
    Advertisement costs 16.3% 16.6% 25.64
    Other expenditure 16.9% 16.6% -30.47
What to expect?
GSKCH has been impacted by slow offtake. Its main-stay product Health Food Drinks (HFD), after registering double-digit volume growth, registered a growth of 9% in offtake for the 15 month period FY14. However, the premium segment of HFD comprising of Women's Horlicks and Promind are growing at a robust pace. Even Chocolate Horlicks has been growing at a brisk pace. Going ahead, weak monsoon can adversely affect its sales particularly from eastern India. The company wants to embark on greenfield expansion over the next three years to expand its capacities that are currently running full-steam. The company would also be expanding its indirect reach by 1.7 lakh outlets in 2014.

We had given a Sell on the stock. At a price of Rs 4605, the stock is trading at 30 times our estimated FY16 earnings.

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

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