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GSK Consumers: Healthy performance
Oct 21, 2005

Introduction to results
Malted beverage major, GSK Consumers (GSK), announced its results for the third quarter ended September 2005 (January-December fiscal) today. The company reported an enthusing bottomline growth arising out of margin expansion due to supply chain improvements. Other income and lower tax outgo has also aided in the bottomline growth outpacing the growth in topline.

(Rs m) 3QCY04 3QCY05 Change 9mCY04 9mCY05 Change
Net sales 2,350 2,587 10.1% 6,552 7,245 10.6%
Expenditure 1,928 2,049 6.3% 5,446 5,786 6.2%
Operating Profit (EBDITA) 422 538 27.6% 1,106 1,459 32.0%
EBDITA margin (%) 17.9% 20.8%   16.9% 20.1%  
Other income 30 47 56.1% 104 167 60.9%
Interest 3 12 369.2% 20 33 67.9%
Depreciation 90 108 19.5% 268 289 7.8%
Profit before Tax 364 465 27.7% 961 1,304 35.7%
Tax 138 162 17.3% 354 424 19.7%
Extraordinary income/(expense) -   -   (23) -
Profit after Tax 226 303 34.0% 607 857 41.3%
Net profit margin (%) 9.6% 11.7%   9.3% 11.8%  
No. of Shares (m) 42.1 42.1   42.1 42.1  
Diluted Earnings per share (Rs)* 21.5 28.8   19.2 27.2  
Price to earnings ratio (x)         17.7  
*(annualised), CY = Calendar Year            

What is the company’s business?
GSK Consumer dominates the Rs 13 bn Indian malted beverage market with a significant 65% share (volume terms). Its white beverage brand ‘Horlicks’ has led the market growth of this sector in India and contributes around 80% to the company’s revenues. The company’s other brands include ‘Boost’, ‘Viva’ and ‘Maltova’. The company also earns 4-5% fees by marketing products for SmithKline Beecham Asia Pvt. Ltd, the parent’s 100% subsidiary. The subsidiary has well known brands like ‘Aquafresh’ in oral care segment, ‘Eno’, ‘Iodex’ and ‘Crocin’ in OTC portfolio.

What has driven performance in 3QCY05?
Topline growth remains robust: GSK managed to clock a decent topline growth (10% YoY) during the quarter seemingly on the back of better volume sales. It must be recollected that the company had recently launched a new variant of Horlicks (Toffee flavour) and has received a positive response. As is known, GSK has been introducing new variants and flavours in a bid to pep up growth, which is evident since the last couple of quarters. It must be noted that while Maltova was relaunched in November 2004, Viva was relaunched in February this year. Also, the company has been focusing on its ‘Boost’ brand with new advertising campaigns, which seems to have helped woo consumers.

Margins continue to improve: Operating margins expanded by 290 basis points during the quarter and are currently at the highest levels in the past 5 quarters. We believe that one of the key cost components, advertising, which stood at around 12.4% of sales in 3QCY05, is likely to remain at around 13% in the current year. The key reason for improved profitability during 3QCY05 was due to cost savings, seemingly owing to lower milk prices, labour efficiencies due to modernisation and mechanisation and reduction in other raw material prices (32% as % of sales). Also, the company barely purchased any finished goods from other parties, which aided in reducing overall costs. Although the results have been enthusing in this quarter, it must be noted that the company has a very volatile revenue growth track record, which is evident from the chart above.

as a % of net sales 3QCY04 3QCY05 9mCY04 9mCY05
Stock 1.5% 3.0% 1.0% -0.8%
RM 32.4% 31.9% 35.0% 34.1%
Finished goods 1.3% 0.0% 1.0% 0.2%
Staff cost 10.2% 10.8% 10.8% 11.5%
Advertising 12.5% 12.4% 11.0% 12.4%
Other exps. 23.0% 21.1% 23.2% 22.4%
Patent and trademark 0.5% 0.0% 0.5% 0.0%
Def. Rev. exps. 0.5% 0.0% 0.6% 0.0%
Total 82.1% 79.2% 83.1% 79.9%

Further, other income was higher during the quarter but this was entirely nullified by higher interest and depreciation costs. Tax outgo was also relatively lower during the quarter with the effective tax rate being at about 34% compared to 38% in 3QCY04.

Over the last few quarters…
  3QCY04 4QCY04 1QCY05 2QCY05 3QCY05
Sales growth (YoY) 3.0% 7.6% 6.2% 15.5% 10.1%
Advertising as % of sales 15.3% 14.5% 12.0% 13.0% 12.4%
OPM (%) 17.9% 8.6% 19.2% 20.3% 20.8%
Net profit growth (%) 37.3% 83.6% 35.2% 56.9% 34.0%

What to expect?
At the current price of Rs 480, the stock is trading at a price to earnings multiple of 16.7 times our estimated CY07 earnings. GSK’s performance has been no doubt encouraging during the September quarter and also during the nine-months ended September 2005. The business restructuring and supply chain correction has paid off and that is good news. Also, we believe that the company will perform better in the quarters to come, as raw material prices are softening and some key brands are exhibiting growth due to increased offtake. The fact that the company is reinvesting to build brands is, according to us, a big positive.

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