GSK Consumers: Enthusing quarter! - Views on News from Equitymaster

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GSK Consumers: Enthusing quarter!

Jul 22, 2005

Introduction to results
Malted beverage major, GSK Consumers (GSK) has announced its results for the second quarter ended June 2005 (January-December fiscal). The company has reported a strong growth in both the topline and bottomline, despite VAT problems in the first month of the quarter. Margins witnessed an expansion due to lower input costs and correction in supply chain. Sales from new products also aided to the overall picture.

(Rs m) 2QCY04 2QCY05 Change 1HCY04 1HCY05 Change
Net sales 2,102 2,428 15.5% 4,202 4,658 10.9%
Expenditure 1,759 1,936 10.1% 3,518 3,737 6.2%
Operating profit 343 492 43.5% 684 921 34.6%
Operating margins (%) 16.3% 20.3% 16.3% 19.8%
Other Income 33 60 81.4% 74 120 62.8%
Interest (net) 9 (11) 17 (21)
Depreciation 89 101 13.4% 178 204 14.3%
Profit before Tax 296 441 49.1% 597 817 36.9%
Tax 110 149 35.9% 216 262 21.2%
Profit after Tax/(Loss) 186 292 56.9% 381 555 45.8%
Net profit margin (%) 8.8% 12.0% 9.1% 11.9%
No. of Shares (m) 45.4 42.1 45.4 42.1
Diluted Earnings per share (Rs)* 16.4 27.7 16.8 26.4
Current P/e ratio 16.7

What is the company’s business?
GSK Consumer 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 OTC portfolio.

What has driven performance in 2QCY05?
Topline show continues: While maintaining realisations, GSK managed to clock good volumes in the quarter inspite of VAT related problems due to lack of clarity leading to stockists refraining from stocking goods. The company recently launched a new variant of Horlicks (Toffee flavour) and has received a positive response. As is known, GSK has been introducing new variants and flavours in a bid to pep up growth, which is evident from the last 2 quarters. It must be noted that while Maltova was relaunched in November last year while Viva was relaunched in February this year.

Margins aid bottomline growth: Operating margins expanded by 4% during the quarter and are currently at the highest levels since the past 5 quarters. Although one of the key cost components, advertising, which stood at 13% of sales in 2QCY05, is likely to remain at the same levels in the current year. The key reason for improved profitability during 2QCY05 was due to cost savings, owing to lower milk prices, labour efficiency due to modernisation and mechanisation and reduction in other raw material prices (32% of sales) being favourable. Although the results have been enthusing in this quarter, it must be noted that the company has a very volatile track record for revenue growth, which is evident from the chart above.

Over the last few quarters…
  2QCY04 3QCY04 4QCY04 1QCY05 2QCY05
Sales growth (YoY) 6.4% 3.0% 7.6% 6.2% 15.5%
Advertising as % of sales 10.7% 15.3% 14.5% 12.0% 13.0%
OPM (%) 16.3% 17.9% 8.6% 19.2% 20.3%
Net profit growth (%) -16.6% 37.3% 83.6% 35.2% 56.9%

What to expect?
At Rs 442, the stock is trading at a price to earnings multiple of 15.4 times our estimated CY07 earnings. GSK’s performance has been no doubt encouraging during the June quarter. The business restructuring and supply chain correction has paid off and that is good news. Also, we believe that the company will perform better in the quarters to come, as raw material prices are softening and key brands are exhibiting growth due to increased offtake. The fact that the company is reinvesting to build brands is, according to us, a big positive.

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