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GSK Cons.: Sales fail to boost margins

Aug 7, 2013 | Updated on Oct 30, 2019

GSK Consumer Healthcare Ltd has announced second quarter results of calendar 2013(2QCY13) results. The company has reported a 17% YoY growth in sales and 12.5% YoY rise in net profits. Here is our analysis of the results

Performance summary
  • Topline grew by 17% led by 10% rise in realizations and 7% volume growth. During 1HCY13, revenues increased by 17%.
  • The operating margin contracted by 0.9% due to steep rise in staff costs and other expenditure. For 1HFY13, operating margin declined by 0.9% due to higher staff costs and ad-spends.
  • Net profit grew by 12.5% on a 12% rise in operating profit and 35% increase in other income. In 1HFY13, net profits increased by 15.9%.

Standalone Financial Snapshot
Rs(m) 2QCY12 2QCY13 Change 1HCY12 1HCY13 Change
Revenue 7,584 8,903 17.4% 15948.4 18656.8 17.0%
Expenditure 6,191 7,343 18.6% 12704 15033.4 18.3%
Operating profit (EBDITA) 1,394 1,560 12.0% 3,244 3,623 11.7%
EBDITA margin (%) 18.4% 17.5%   20.3% 19.4%  
Other income 285 385 35.1% 529.9 709.7 33.9%
Interest 8 2 -80.7% 20.1 3 -85.1%
Depreciation 86 122 42.7% 204.7 229 11.9%
Profit before tax 1,585 1,822 14.9% 3,550 4,101 15.5%
Extraordinary inc/(exp) - -   - -  
Tax 519 623 19.9% 1,164 1,337 14.9%
Profit after tax/(loss) 1,066 1,200 12.5% 2,386 2,764 15.9%
Net profit margin (%) 14.1% 13.5%   15.0% 14.8%  
No. of shares (m)         42  
Diluted earnings per share (Rs)*         113  
Price to earnings ratio (x)*         35.40  
*trailing twelve months

What has driven performance in 2QCY13?
  • Revenues grew by 17% backed by a 7% rise in offtake during the quarter. The growth was primarily driven by an 18% rise in domestic operations that constitute more than 90% of overall sales. Exports grew by a tepid 4% during the quarter. Among product segments, Health Food Drinks (HFD) grew by 18% with Horlicks & Boost clocking 19% and 15% growths, respectively. Even packaged foods registered a robust growth of 19% with strong growth in biscuits and oats.

  • The robust sales failed to improve the company's operating performance. Due to a one-off cost of settlement dues at one of its factories, staff costs to sales ratio soared by 1.3% to 11.7%. Even the proportion of other expenses in sales increased by 1.5% to 21.8% due to non-recurring expenses arising from higher third-party manufacturing and repairs & maintenance charges. This has more than offset the input cost savings from easing commodity inflation. Resultantly, the operating margin contracted by 0.9% during the quarter.

  • At the net level, profits grew by 12.5% aided by 12% rise in operating profit. The other income comprising of business auxiliary income and interest income grew by 35% during the quarter. With the commissioning of new capacities, the depreciation charges increased by 43% during the quarter. Even the tax incidence increased to 34% from 32.8% in the year-ago quarter.

    Cost break-up
    As a % of sales 2QCY12 2QCY13 Change in basis points
    Cost of goods sold 35.6% 33.5% -209.94
    Staff costs 10.4% 11.7% 129.94
    Advertisement costs 15.3% 15.5% 14.44
    Other expenditure 20.2% 21.8% 150.64

What to expect?

Strong brand equity of the Horlicks brand has enabled GSKCH to report robust volume offtake despite price-hikes. Even its packed food business is registering good growth backed by rising demand for biscuits and oats. However the company's operating margin is under pressure due to higher ad-spends and staff costs. Going forward, rising price of inputs such as wheat, sugar and milk powder and high promotional spends in a competitive environment are expected to keep margins depressed.

We had given a Sell on the stock. At a price of Rs 3993, the stock is trading at 27 times our estimated CY14 earnings.

At current price levels, the stock remains overpriced and we re-iterate a SELL on the stock.

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Apr 15, 2020 (Close)


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