GSK Cons.: Back on double-digit growth path - Views on News from Equitymaster

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GSK Cons.: Back on double-digit growth path

Aug 25, 2011

GSK Consumer Healthcare Ltd has announced second quarter results of calendar year 2011(2QCY11) results. The company has reported a 22% YoY and 15.8% YoY growth in income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales grew by 21.6% YoY after a tepid rise of 9.5% in the previous quarter. The robust performance was backed by brisk growth of 16% in offtake.
  • Operating (EBITDA) margins for the company contracted by 126 basis points due to higher cost of goods sold & advertisement expenses as percentage of sales.
  • Net profit grew by a modest 15.8% on account of a slower rise in operating income partially offset by rising other income and lower tax incidence.

Rs(m) 2QCY10 2QCY11 Change
Revenue 5,525 6,739 22.0%
Expenditure 4,480 5,548 23.9%
Operating profit (EBDITA) 1,045 1,190 13.9%
EBDITA margin (%) 18.9% 17.7%  
Other income 129 155 19.9%
Interest 9 6 -31.1%
Depreciation 93 113 21.9%
Profit before tax 1,073 1,226 14.3%
Extraordinary inc/(exp) - -  
Tax 358 398 11.3%
Profit after tax/(loss) 715 827 15.8%
Net profit margin (%) 12.9% 12.3%  
No. of shares (m) 42 42  
Diluted earnings per share (Rs)*   77.3  
Price to earnings ratio (x)*   30.1  
*trailing twelve months

What has driven performance in 2QCY11?
  • The company's sales grew by a robust 21.6% led by a 16% jump in volumes on a YoY basis. In its mainstay health food drinks (HFD) segment, Horlicks and Maltova brands registered sales growth of 21% YoY and 19% YoY, respectively. The growths were driven by 11-16% increase in volumes and price-hikes of around 5-8%. Robust double-digit growth in the biscuits and noodle categories saw the contribution share of non-HFD segment grow by 110 basis points YoY to 6.2% of sales during the quarter. Regionwise, the company clocked the fastest growth of 31% YoY in the north where the revenue share is a miniscule 6% as compared to a revenue share of 44% in the south. Even exports that form 11% of sales, surged by 57% YoY in 2QCY11.

  • The overall price hike of 6% in 2QCY11 was unable to plug inflation in input costs. Thus the cost of goods sold to sales ratio increased by 275 basis points YoY to 39.4%. Increased competition particularly in the malted beverages led to a 124 basis points YoY jump in the company's ad-spends to sales ratio. Consequently, the operating margins fell by 126 basis points YoY to 17.7%.

  • At the net level, a 20% YoY increase in other income, mainly from business auxillary commission and interest earnings, coupled with lower tax incidence eased off margin pressure to some extent. As a result the profitability was marginally down by 66 basis points YoY to 12.3% in 2QCY11.

Cost break-up
As a % of sales 2QCY10 2QCY11 Change in basis points
Cost of goods sold 36.7% 39.4% 275
Staff costs 10.7% 10.1% 57
Advertisement costs 13.6% 14.8% 124
Other expenditure 20.2% 18.0% -216

What to expect?

At a price of Rs 2,329, the stock is trading at 22.3 times our estimated CY13 earnings. The company returned to its 20% plus growth phase in 2QCY11 backed by continued dominance in HFD's (70% market share) despite rising competition, growing demand for the non-HFD's and rising exports. Growing share of HFD revenues from the northern markets, brisk growth in biscuit, noodles & toothpaste segments and higher exports to the overseas markets in Bangladesh & Middle-East are future growth drivers. But at current high valuations, we advice 'CAUTION' on this stock.

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