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GSK Consumer: Favorable cost scenario props up profits... - Views on News from Equitymaster

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  • Aug 12, 2015 - GSK Consumer: Favorable cost scenario props up profits...

GSK Consumer: Favorable cost scenario props up profits...
Aug 12, 2015

GSK Consumer Healthcare declared results for the quarter ended June 2015. The company's revenues were up by 8% YoY, while profits rose by 19% YoY. Here is our analysis of the results:

Performance summary
  • Revenues rise by 8% YoY.
  • Operating profits grow by 21% YoY; margins expand by 2% YoY to 19%.
  • Net profits expand by 19% YoY led by a strong operating performance.

Financial performance summary
(Rs m) 1QFY15 1QFY16 Change
Revenues 9,660 10,450 8.2%
Expenditure 8,013 8,461 5.6%
Operating profit (EBITDA) 1,646 1,989 20.8%
EBITDA margin (%) 17.0% 19.0%  
Other income 458 549 20.0%
Depreciation 119 154 29.1%
Finance cost 2 2 10.5%
Profit before tax 1,983 2,383 20.1%
Tax 682 832 22.1%
Profit after tax/(loss) 1,301 1,550 19.1%
Net profit margin (%) 13.5% 14.8%  
No. of shares (m) 42.1 42.1  
Diluted earnings per share (Rs)*   144.7  
Price to earnings ratio (x)   43.4  
(*On a trailing 12-month basis)

What has driven performance in the quarter ended June 2015?
  • GSK's revenues grew by 8% YoY. As per the company, its 'Horlicks' brand gained market share by 1% during the quarter and continued to maintain its leadership position.

  • Growth would have been higher had it not been for the phase out of excise duty benefits. The south and east regions remain the key markets for the company with the split being 47% and 37% respectively. Exports formed about 6% of the revenues during the quarter. The north and West markets form about 6% and 4% of sales respectively.

  • At the operating level, profits were up by 21% YoY as margins expanded by 2% YoY to 19% led by lower input costs (as a percentage of sales). Net profits grow at similar pace during the quarter.
What to expect?
At the current price of Rs 6,278, GSK trades at a multiple of about 43.4x its trailing twelve month earnings and at about 35x our estimated FY17 EPS.

The company continues to largely focus on marketing & expanding its brand extensions as well as expanding its reach across the country. Rural market expansion is a key focus for the company. The company now has over 13,000 sub distributors, which allow it to reach out to over 200,000 touch points across 27,000 villages. The company is looking to expand its distribution reach and hoping to add 1 m outlets to its network in the next year.

As for our view on the stock, we reiterate that it remains overpriced at the current level and that investors should not buy the stock at this juncture.

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