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SBCH: Will Iodex break jinx? - Views on News from Equitymaster
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  • Jun 26, 2001

    SBCH: Will Iodex break jinx?

    There is news that Glaxo Smithkline Beecham Pharmaceuticals is transferring its Rs 750 m brand, Iodex, to Smithkline Beecham Consumer Healthcare Limited (SBCH). Iodex, the leader in pain balms, is predominantly an over the counter (OTC) product, with more than 90% of sales from this route. The rest is sold through chemist shops. However, the consideration or the royalty on sales to be paid to Glaxo SmithKline is yet to be decided.

    SBCH shareholders must heave a small sigh of relief. Their stock has been trading on the lower side of the FMCG valuations (P/E of 15.7x 1QFY02 annualised earnings) for quite some time. This despite the company clocking double-digit growth rates both in topline and bottomline even in this difficult environment for FMCG products. In FY01, SBCH’s topline and bottomline grew by 20.4% and 14.6% respectively. A 28% decline in the company’s other income coupled with a huge 74% jump in its interest burden was largely responsible for the sluggish growth in the bottomline.

    This was because SBCH strengthened its dominating position in the malted beverages segment with the acquisition of Viva and Maltova brands from Jagatjit Industries. The company embarked on a capex plan of Rs 2.4 bn for a new plant (26,000 tonnes per annum) to manufacture 'Horlicks' (its main brand). This was done to overcome a potential capacity constraint in the future. SBCH is also increasing capacity at its existing plant by 6,000 tonnes per annum. Productivity levels are expected to improve substantially as the new plant is based on the latest available technology. As a result of this the profit growth of the company has stagnated, as it will not be able to capitalise the expenditure.

    In the first quarter of FY02 SBCH declared a 26% jump in its bottomline YoY. Its topline too has grown by nearly 25% YoY. But even this has not helped the company get a re-rating because of the concerns about the future of SBCH post merger with Glaxo. There were also concerns regarding SmithKline’s other subsidiaries in India.

    But if the Iodex transfer goes through then the stock might regain some of the lost confidence on the bourses. The transfer does make sense considering SBCH’s strong distribution focus. It will not only add Rs 750 m to its topline (around 10% of SBCH’s FY01 net sales) but the royalty amount is also not expected to be very high. For Horlicks, SBCH pays around 4% of the brand’s turnover as royalty to its parent.

    At the current price of Rs 395 SBCH’s current market cap to net sales is around 2.4 times. Post transfer of Iodex, this market cap to net sales will stand reduced to 2.2 times.



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