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GSK Cons.: Profits up on lower operating costs - Views on News from Equitymaster

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GSK Cons.: Profits up on lower operating costs
Aug 2, 2010

GSK Consumer Healthcare Ltd has announced its 2QCY10 results. The company has reported a 13.6% YoY and 30% YoY growth in sales and net profits respectively. Here is our analysis of the results

Performance summary
  • The company has seen strong sales with growth of 13.6% YoY for 2QCY10.
  • Operating (EBITDA) margins for the company remained flat at 18.9% (as a percentage of sales).
  • Bottom line for the quarter grew by 30% YoY on the back of higher operating income, increase in other income, lower depreciation costs and lower effective tax rates.
  • For 1HCY10, the company’s net profits increased by 20.7% while the net profit margins grew by 0.4% to 13.8%. This performance comes on the back of increase in operating income, higher other income, fall in depreciations costs and lower effective tax rates.


Rs(m) 2QCY09 2QCY10 Change 1HCY09 1HCY10 Change
Net sales 4,862 5,525 13.6% 10,399 12,165 17.0%
Expenditure 3,946 4,480 13.5% 8,127 9,626 18.4%
Operating profit (EBDITA) 916 1,045 14.1% 2,272 2,540 11.8%
EBDITA margin (%) 18.8% 18.9%   21.8% 20.9%  
Other income 58 129 122.6% 145 201 39.0%
Interest 11 6 -41.0% 22 12 -46.9%
Depreciation 105 93 -11.9% 211 189 -10.8%
Profit before tax 859 1,076 25.3% 2,182 2,540 16.4%
Extraordinary inc/(exp)            
Tax 307 358 16.8% 791 861 8.8%
Profit after tax/(loss) 552 718 30.0% 1,391 1,679 20.7%
Net profit margin (%) 11.4% 13.0%   13.4% 13.8%  
No. of shares (m) 42 42   42 42  
Diluted earnings per share (Rs)*         62.2  
Price to earnings ratio (x)*         28.7  
*trailing twelve months

What has driven performance in 2QCY10?
  • The company witnessed strong sales growth in 2QCY10 on the back of robust volume growth in Horlicks and Boost. This comes on the back of new product innovations and higher spending towards brand building. Volume growth contributed 10% to sales while value growth contributed 3.6%. Horlicks grew by 10% YoY while Boost grew by 17% YoY in volume terms during the quarter.

    Cost break-up
    As a % of sales 2QCY09 2QCY10 1HCY09 1HCY10
    Raw material 35.4% 36.7% 37.1% 37.7%
    Staff costs 10.8% 10.7% 9.8% 9.1%
    Advertisement costs 15.4% 13.5% 13.0% 14.2%
    Other expenditure 19.6% 20.2% 18.2% 18.1%

  • While advertisement costs fell as a percentage of sales fell during the quarter, operating margins remained flat. This was due to increase in cost of raw material as well as other expenditure (both as a percentage of sales). Raw material costs were higher as a result of increase in milk prices. Milk prices have increased 25% YoY during the quarter.

  • While net profit grew by 30% during the quarter, net profit margins increased by 1.6% to stand at 13% during the quarter. This was due to increase in other income, lower depreciation charges and lower effective tax rate. The tax rate was lower as FBT is no longer applicable.

What we expect?
At Rs.1,771, the stock is trading at 21.3 times our estimated CY12 earnings. The company's products have been facing good traction with biscuits growing quite sharply during the quarter. The company's newly launched noodles 'Foodles' have garnered a market share of 4% in the east India markets in addition to 5% in south India markets. The company also stands to benefit from its flagship brands as the market is still largely under penetrated, allowing good head room for growth. Given the company's potential for growth, we believe this is a good stock for long term investment. However, high food inflation can be a dampener for the company's growth. Nevertheless, given the high price of the stock, we believe that valuations are expensive and advice 'CAUTION' on this stock.

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