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GSK Consumers: Volume drives growth - Views on News from Equitymaster

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GSK Consumers: Volume drives growth
Jul 30, 2008

Performance summary
  • Reports a 19% YoY and 23% YoY growth in the topline in 2QCY08 and 1HCY08 respectively, led by growth in its key brands.
  • Operating margins fall by 4% in 2QCY08 and 1.8% in 1HCY08 on account of higher raw material and ad costs.
  • While the bottomline for 2QCY08 was up 9%, the half yearly profits witnessed an increase of 22% YoY.


Rs m 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
Net sales 3,156 3,764 19.3% 6,421 7,870 22.6%
Expenditure 2,571 3,218 25.1% 5,212 6,527 25.2%
Operating profit 585 546 -6.6% 1,209 1,343 11.1%
Operating margins (%) 18.5% 14.5%   18.8% 17.1%  
Other Income 166 262 57.5% 305 448 46.7%
Interest (net) 11 13 17.3% 22 26 17.7%
Depreciation 109 102 -6.1% 217 208 -4.0%
Profit before Tax 631 692 9.7% 1,275 1,556 22.1%
Tax 208 231 11.0% 429 529 23.3%
Profit after Tax/(Loss) 423 462 9.1% 846 1,028 21.5%
Net profit margin (%) 13.4% 12.3%   13.2% 13.1%  
No. of Shares (m) 42.1 42.1   42.1 42.1  
Diluted Earnings per share (Rs)*         43.0  
Current P/e ratio         14.9  
*12 months trailing earning

What has driven performance in 2QCY08?
  • GSK Consumers reported a 19% YoY and 23% YoY growth in the topline in both the periods under consideration. The quarter witnessed 13% YoY volume growth and 6% YoY price hikes. While Horlicks has grown by 20% YoY, Boost saw a 14% YoY jump in the quarter. It also introduced two new variants in ‘Horlicks’ during the quarter. Its ‘Women Horlicks’ and ‘Actibase’ are performing in line with management expectations. The biscuits portfolio grew by 22% YoY. The company however has existed the vending machine segments on account of losses in that segment. The management expects the company to report around 8% to 9% volume growth for the whole year. It would also continue to innovate and launch new products. The results are in line with our expectations.

    Cost break-up
    As a % of net sales 2QCY07 2QCY08 1HCY07 1HCY08
    Total Cost of goods 34.9% 39.0% 35.3% 38.2%
    Staff Cost 12.5% 12.0% 11.6% 10.6%
    Advertising 12.5% 13.5% 12.8% 13.5%
    Other Expenditure 21.5% 21.1% 21.4% 20.6%

  • The operating margins were dented by 4% in 2QCY08 and were down 1.8% in 1HCY08. While the raw material costs for both the periods were higher by nearly 33% YoY, the ad spends increased by 28% YoY. Malt (up 38% YoY), milk and milk powder (up 12% to 15% YoY) and wheat (13%), which are the main raw materials for the company, witnessed higher prices. The company took price hikes to offset these pressures, however going forward, the management has indicated that further hikes would be difficult on account of the nature of consumption and competitive environment. The ad spends were higher on account of new product launches and are expected to remain on the higher side, around 13% of sales for the whole year.

  • While the bottomline for 2QCY08 was up 9%, the half yearly profits witnessed an increase of 22% YoY. Higher other income and lower depreciation aided the profit jump for 1HCY08.

    What to expect?
    At the current price of Rs 640, the stock is trading at a multiple of 12.1 times our CY10 earnings estimates. The management has indicated of a growth of 12% to 13% over the next 2 to 3 years. Though the competition is increasing with Dabur and HUL entering the malted segment, the penetration levels are still low and there is enough room for the players to expand the market. While margins would be under pressure, volumes will be the key driver of the growth. The company is also expanding its capacities by end of CY09 or beginning of CY10. It has lined three-step strategy to grow in the coming years. It wants to leverage the ‘Horlicks’ brand to other segments, introduce parent’s products in India and also target the bottom of pyramid consumers. These plans are expected to materialize by CY10. Over the next coming quarters, the company would continue with its brand building and portfolio strengthening activities. Overall we have a positive view on the stock.

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