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GSK Consumers: Volumes drive growth
Jul 28, 2006

Performance summary
Malted beverage major, GSK Consumers (GSK) announced its results for the second quarter ended June 2006 (January-December fiscal) late yesterday. The company reported 11% YoY growth in the net sales for 2QCY06. On the back of higher staff and other costs, operating margins declined by almost 3% YoY. Due to this contraction in operating margins and despite higher other income, net profits grew by a mere 6% YoY.

Rs m 2QCY05 2QCY06 Change 1HCY05 1HCY06 Change
Gross sales 2,757 2,931 6.3% 5,300 5,963 12.5%
Less : excise duty 329 243 -26.3% 642 506 -21.2%
% of sales 11.9% 8.3%   12.1% 8.5%  
Net sales 2,428 2,688 10.7% 4,658 5,457 17.2%
Expenditure 1,936 2,227 15.0% 3,737 4,416 18.2%
Operating profit 492 461 -6.2% 921 1,042 13.0%
Operating margins (%) 20.3% 17.2%   19.8% 19.1%  
Other Income 60 142 136.7% 120 214 78.9%
Interest (net) 11 9 -18.1% 21 16 -22.4%
Depreciation 101 105 3.6% 204 209 2.5%
Profit before Tax 440 490 11.3% 816 1,030 26.3%
Tax 149 181 21.1% 261 376 44.1%
Profit after Tax/(Loss) 291 309 6.3% 555 654 17.9%
Net profit margin (%) 12.0% 11.5%   11.9% 12.0%  
No. of Shares (m) 42.1 42.1   42.1 42.1  
Diluted Earnings per share (Rs)*         28  
Current P/e ratio         17.4  
*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 has driven performance in 2QCY06?
Volume driven: GSK reported a 17% YoY growth in topline during the half-year period. This was led by a 9% YoY growth in volumes, supported by a 2% YoY improvement in realisations. Its flagship brand ‘Horlicks’ reported a strong double-digit growth during the quarter. Also its Chocolate Horlicks brand witnessed strong sales on back of strong promotion effort. The company’s other brands ‘ Maltova’ and ‘Boost’ too performed well. Revenue growth was also aided the biscuit segment. As earlier, GSK is planning to introduce new variants and flavours in a bid to pep up growth, which is likely to help its topline in the future.

Lower margins: Margins for both the periods under consideration have declined on YoY basis. For the quarter, the fall was mainly due to higher labour and other expenses. Staff costs were higher due to salary hikes in April 2006 and a one-time expense to the tune of Rs 12 m as retirement expenses. Also, since the company’s Baddi plant contributed nearly 60% of the turnover in the half year, it led to a decline in the excise costs.

Cost break-up
As a % of net sales 2QCY05 2QCY06
Total Cost of goods 32.3% 31.6%
Staff Cost 11.5% 13.1%
Advertising 13.0% 12.4%
Other Expenditure 23.0% 25.8%

Bottomline picture: On the back of contraction in operating margins, the bottomline growth has underperformed growth in topline during the quarter. But for the lower interest costs and higher other income, growth in the bottomline would have been lower. Other income has increased due to the change in the accounting policy with regards to the OTC products.

What to expect?
At the current price of Rs 483, the stock is trading at a price to earnings multiple of 17.4 times its 12-month trailing earnings. The company has indicated a weighted average hike of 3% in prices for the year. Also all its categories are seeing rise in volumes. Also, the company is likely to introduce new variants and invest in building brands in the future and this, we believe, will drive growth.

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