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GSK Consumers: Nourishing quarter - Views on News from Equitymaster

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GSK Consumers: Nourishing quarter
Jul 26, 2007

Performance summary
  • Sales grow 17.8% YoY in 2QCY07 led by double-digit growth in its key brands.

  • Operating margins expand by 130 basis points in 2QCY07 on the back of lower labour and other expenses.

  • Bottomline up 37% YoY led by higher operating income and lower tax rates.

Rs m 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
Gross sales 2,922 3,444 17.9% 5,944 7,006 17.9%
Less : excise duty 242 288 19.0% 506 585 15.6%
% of sales 8.3% 8.4%   8.5% 8.3%  
Net sales 2,680 3,156 17.8% 5,438 6,421 18.1%
Expenditure 2,218 2,571 15.9% 4,397 5,212 18.5%
Operating profit 462 585 26.6% 1,041 1,209 16.1%
Operating margins (%) 17.2% 18.5%   19.1% 18.8%  
Other Income 142 166 16.9% 214 305 42.4%
Interest (net) 9 11 27.9% 16 22 35.0%
Depreciation 105 109 3.8% 209 216 3.3%
Profit before Tax 490 631 28.7% 1,030 1,276 23.9%
Tax 181 208 15.2% 376 429 14.1%
Profit after Tax/(Loss) 310 423 36.5% 654 847 29.6%
Net profit margin (%) 11.6% 13.4%   12.0% 13.2%  
No. of Shares (m) 42.1 42.1   42.1 42.1  
Diluted Earnings per share (Rs)*         34.7  
Current P/e ratio         16.7  
*12 months trailing earning

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 drove the performance for 2QCY07?
Key brands drive growth: Backed by strong double-digit growth in its flagship brands Horlicks and Boost, GSK Consumer reported a topline growth of 18% YoY for 2QCY07. The company's flagship brands grew 18% in value terms. Boost reported a 20% YoY volume growth in the quarter under consideration. Also, the company in this quarter adopted aggressive sales strategy to promote some of its products. It had a tie up with Hollywood movie Spiderman-3 to promote its Chocolate Horlicks. Also Horlicks Lite, which was relaunched in February, witnessed a revival in demand. Junior Horlicks' secondary sales also did well. The company has done well to maintain its growth rate. Experiments with newer products/ variants have helped the company in dominating the ‘Health Food Drink’ market where it has a market share of around 70%. The increase in penetration in rural areas, growth in population and upsurge in FMCG market would continue to drive the growth going forward.

Higher margins: Margins for both the periods under consideration have improved on a YoY basis. For the quarter, the margins were higher by 1.3% YoY. This was mainly due to lower labour and other costs. Major raw material of the company is milk and milk powder. The raw material costs were up from 32.7% (as a percent of sales) in 2QCY06 to 34.9% in 2QCY07. The margins are higher than our expectations.

Cost break-up
As a % of net sales 2QCY06 2QCY07 1HCY06 1HCY07
Total Cost of goods 32.7% 34.9% 34.1% 35.3%
Staff Cost 13.1% 12.5% 11.3% 11.6%
Advertising 12.4% 12.5% 13.4% 12.8%
Other Expenditure 24.6% 21.5% 22.0% 21.4%

Bottomline picture: Higher operating margins coupled with lower depreciation and tax rates has led to the bottomline growth of 36.5% YoY.

What to expect?
At the current price of Rs 580, the stock is trading at a price to earnings multiple of 13.3 times our FY10 estimates. As of now, the penetration for health food drinks is less than half of the population. The company is making efforts to target rural areas to market its products. Also, its investments in manufacturing plants, R&D projects and product innovation would continue driving its growth. Also, the Government of India has been encouraging the commercialization of the country's food processing sector as its first priority, with various fiscal incentives. This would further be a booster for the company.

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