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GSK Consumer: Strong revenue growth - Views on News from Equitymaster
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GSK Consumer: Strong revenue growth
Jul 29, 2009

Performance summary
  • The company has seen strong sales with growth of 24% YoY
  • Operating (EBITDA) margins for the company have expanded to 19% thanks to lower raw material and staff costs as a percentage of net sales. Operating margins could have been higher but for an increase in advertising and promotion spending which grew by 48% YoY.
  • Bottom line grows by 14% YoY. Net profit margin was lower as a percentage of sales at 11% due to lower other income, higher interest costs and taxes.

Finanacial results
Rs(m) 2QCY08 2QCY09 (%) Change
Net sales 3,911 4,855 24.2%
Expenditure 3,220 3,942 22.4%
Operating profit (EBDITA) 691 913 32.2%
EBDITA margin (%) 17.7% 18.8%  
Other income 117 60 -48.5%
Interest 13 37 184.5%
Depreciation 102 105 2.8%
Profit before tax 692 832 20.1%
Tax 231 307 32.8%
Profit after tax/(loss) 462 525 13.7%
Net profit margin (%) 11.8% 10.8%  
No. of shares (m) 42.1 42.1  
Diluted earnings per share (Rs)*   53.4  
Price to earnings ratio (x)*   20.2  
* On a trailing 12 months basis

What has driven growth in 2QCY09?
  • GSK has seen a growth of 12% from volumes, 7% from price hikes and the balance 5% from excise duty reduction. Horlicks posted 12% YoY growth in volumes while Boost posted 10% YoY volume growth. Biscuits grew by 16% YoY. Rural market contributed 15-20% of net sales and saw a growth rate marginally higher than that of the urban markets. Exports which contribute 8-9% of net sales saw a 30% YoY growth.

  • Operating margins were higher this quarter due to lower raw material cost as a percentage of net sales. Although GSK is seeing higher raw material prices, it has been successful in taking price hikes which more than neutralize the price increases and contribute to margins.

  • Net profit has increased thanks to increase in net sales and higher operating margins. However, GSK this quarter shifted its liquid investments from high interest low tax liquid funds to short term fixed deposits. This has resulted in lower other income and higher tax expenses bringing down the net interest margins as a percentage of sales.

What to expect?
At Rs.1080, the stock is trading at a multiple of 19 times our estimated FY11 earnings.

GSK has achieved a high volume led growth with price hikes ahead of costs in the face of competition from brands like Bournvita (Cadbury), Complan (Heinz) and Milo (Nestle). However, in case of a sub-par monsoon, the prices of commodities like milk, wheat, sugar and barley, which are the main raw materials for GSK can shoot up. Moreover, in case of rising commodity prices, to rationalize household expenditure, brands of GSK which are discretionary items may not find a place in the monthly household food list. We are being cautious on this company as of now as the valuations seem to be high.

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Feb 22, 2018 (Close)


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