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GSK Consumer: Margin blues

Jul 23, 2004

Introduction to results
Malted beverage major, GSK Consumer, continues its struggle to return to form. The company has reported over 6% topline growth during the June quarter. However, continued pressure on operating margins is largely responsible for the 17% bottomline dip during the quarter. The sales growth was slower as compared to the March quarter, where it grew by nearly 16%.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net Sales 1,976 2,102 6.4% 3,793 4,202 10.8%
Other Income 63 33 -46.9% 102 74 -27.5%
Expenditure 1,595 1,759 10.3% 3,062 3,518 14.9%
Operating Profit (EBDIT) 381 343 -10.1% 731 684 -6.4%
Operating Profit Margin (%) 19.3% 16.3%   19.3% 16.3%  
Interest 4 (9) - 7 (17) -
Depreciation 91 89 -2.4% 182 178 -2.3%
Profit before Tax 349 296 -15.2% 644 597 -7.3%
Tax 123 110 -10.5% 222 216 -2.6%
Extraordinary items (3) 0 - (18) 0 -
Profit after Tax/(Loss) 223 186 -16.6% 405 381 -5.8%
Net profit margin (%) 11.3% 8.8%   10.7% 9.1%  
No. of Shares (m) 45.4 45.4   45.4 45.4  
Diluted Earnings per share (Rs)* 19.6 16.4   17.8 16.8  
P/E ratio (x)   14.2     13.8  
*(annualised)            

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 to 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' and 'Crocin' in OTC portfolio. It recently also took up marketing of 'Iodex' for GSK Pharma.

What has driven performance in 1QFY05?
Sales: The company still seems to be struggling and is yet to stabilise. Its revenue trend has been very volatile over the last seven quarters (see chart). GSK Consumer has provided no indication of how the malted beverage segment is growing, but we believe that the segment growth has slowed from its earlier average of 10% plus rate over the past decade.

Operating margins: In a bid to revive volume growth, the company launched several taste variants of its flagship 'Horlicks' brand during 2003. It also went in for a complete overhaul of the packaging and looks of the product. But it faced resistance to price increases and faced competition from players like Cadbury's (Bournvita), Nestle (Milo) and Heinz (Complan) who want to increase their share in this pie. Consequently, advertising costs as a percentage of sales have gone up to 10.7% during the quarter. Staff costs too, surged by over 18% YoY.

Cost break-up
as a % of net sales 2QFY04 2QFY05 1HFY04 1HFY05
Stock -9.3% 1.2% -3.5% 0.8%
Raw material consumption 41.7% 35.4% 36.8% 36.5%
Finished goods 1.0% 0.6% 0.9% 0.8%
Staff cost 10.6% 11.8% 10.8% 11.1%
Advertising 9.0% 10.7% 9.7% 10.2%
Other expenses 25.8% 22.8% 24.0% 23.2%
Patent and trademark 1.2% 0.5% 1.3% 0.5%
Deferred revenue expenses 0.6% 0.6% 0.7% 0.6%
Total 80.7% 83.7% 80.7% 83.7%

Net profit: The pressure on the bottomline was largely a result of the weakness in the company's operating margins. The shrinking of the other income component by nearly half was also responsible for the 17% dip in profits.

Over the last four quarters
  3QFY04 4QFY04 1QFY05 2QFY05
Sales growth (YoY) -1.6% 7.6% 15.6% 6.4%
Advertising as % of net sales 14.4% 14.5% 9.7% 10.7%
OPM (%) 12.9% 8.6% 16.2% 16.3%
Net profit growth (YoY) -31.5% 83.6% 7.4% -16.6%

What to expect?
The management has declared an interim dividend of Rs 3.3 per share. The stock is trading at Rs 233, reflecting a P/E of 13.8x annualised 1HFY05 earnings, market cap to sales of 1.3x. GSK Consumer has no doubt, made some progress in reversing the decline in topline over the past few quarters. However, market conditions continue to be difficult for this single product company. A full fledged recovery in the company's fortunes still seems some time away.

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