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SBCH: A take on valuations - Views on News from Equitymaster
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  • Sep 27, 2001

    SBCH: A take on valuations

    About a fortnight ago, we had written a story on the sliding growth signals from SmithKline Beecham Consumer Healthcare (SBCH). A lot has changed since then. The uncertainty in the global economy post the attacks on the WTC have seen the Indian bourses slide by nearly 20% and valuations of all sectors have plunged. Even SBCH stock has declined by 11% in the last fortnight. Under these circumstances we revisit the company’s prospects and valuations.

    In the earlier story we had pointed out that SBCH sales growth is showing signs of sluggishness. Also, in 2HFY02 the full impact of the deferred tax would be felt on the company. This is most likely to trim its bottomline growth for the full year FY02. There are also concerns over the parent’s 100% Indian subsidiaries.

    However, post the US situation quite a few things have changed. There seems to be a newfound love for companies which are dependent on the domestic economy rather than on the global markets. FMCG is one such sector and SmithKline Beecham is one of the foremost players in this segment. In the previous five years the company’s turnover has grown at a CAGR of 15% and net profits at a CAGR of 24%. These figures are by far one of the best growth rates posted by an FMCG company. Its EPS has almost doubled in the last four years to Rs 24.7. Its exports accounted for around 4% of its FY01 sales.

    Glittering history
    (Rs m) FY98 FY99 FY00 FY01
    Net sales 4,820 5,549 6,253 7,528
    % growth 13.0% 15.1% 12.7% 20.4%
    Operating profit 865 1,064 1,328 1,604
    Profit after tax 3,955 4,485 4,925 5,923
    Operating profit margin 17.9% 19.2% 21.2% 21.3%
    Net profit margin 12.8% 14.6% 15.6% 14.9%
    EPS 13.6 17.8 21.5 24.7

    Its brands ‘Horlicks’ and ‘Boost’ have a formidable presence in the malted beverage sector and show no signs of relenting to competition. Moreover, beyond 2001, SBCH is poised to reap the advantages of higher economies through the new plant to be commissioned in early 2002 (26,000 tonnes). This will enable it in overcoming potential capacity constraint in the future. The company is also looking at market expansion through lower-priced ‘Viva’ and ‘Maltova’, targeted at smaller town consumers.

    Going forward, despite the concerns mentioned, the company is most likely to continue chugging along at similar growth rates in the long run. Good monsoons would also benefit the company.

    At the current price of Rs 389 the stock is trading at a P/E of 14x projected FY02 earnings (excluding impact of deferred tax). The valuations look attractive against the backdrop of SmithKline’s historical growth momentum.



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