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GSK Consumers: ‘Healthy’ growth - Views on News from Equitymaster

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GSK Consumers: ‘Healthy’ growth

Oct 23, 2007

Performance summary
  • Topline for 3QCY07 and 9mCY07 grows by 17% YoY and 18% YoY respectively, led by both volume and value growth.
  • Operating margins expand by 1.6% YoY in 3QCY07 on the back of lower raw material and other expenses (as percentage of sales).

  • Bottomline for the quarter is up 40% YoY led by higher operating income and lower tax rates.

  • Board has declared an interim dividend of Rs 12 per share (dividend yield 1.9%)

Rs m 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
Net sales 3,006 3,516 17.0% 8,444 9,937 17.7%
Expenditure 2,477 2,840 14.6% 6,874 8,052 17.1%
Operating profit 529 676 27.8% 1,570 1,885 20.1%
Operating margins (%) 17.6% 19.2%   18.6% 19.0%  
Other Income 139 209 50.9% 353 514 45.8%
Interest (net) 11 12 9.1% 27 34 25.9%
Depreciation 110 111 0.9% 319 327 2.5%
Profit before Tax 547 762 39.5% 1,577 2,038 29.3%
Tax 185 258 39.5% 561 688 22.6%
Profit after Tax/(Loss) 362 504 39.5% 1,016 1,350 33.0%
Net profit margin (%) 12.0% 14.3%   12.0% 13.6%  
No. of Shares (m) 42.1 42.1   42.1 42.1  
Diluted Earnings per share (Rs)*         38.1  
Current P/e ratio         16.5  
*12 months trailing earning

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% to 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 drove the performance for 3QCY07?
Growth continues: 3QCY07 has been the best quarter till now for the company in terms of sales volumes. ‘Horlicks’ had a superlative performance and recorded the highest ever-sales growth in July 2007. New variants were introduced in ‘Boost’, which further aided the topline performance. While volumes grew by 7% YoY, the growth in value terms stood at 9% YoY. For 9mCY07, the company affected a 5.5% hike on the pricing front. General trade recorded an increase of 15% YoY from 9mCY07. Modern trade though currently contributes only 3% to the total topline, witnessed a rise of 30% YoY. The company expects the share to increase going further. Exports witnessed a 12% YoY growth for 3QCY07 and contributed around 5% to the total sales. The company is also planning to introduce the parent company’s products by 2QCY08.

Cost break-up
As a % of net sales 3QCY06 3QCY07 9mCY06 9mCY07
Total Cost of goods 36.5% 35.3% 35.0% 35.3%
Staff Cost 10.9% 11.3% 11.1% 11.5%
Advertising 12.2% 13.2% 13.0% 13.0%
Other Expenditure 22.9% 20.9% 22.3% 21.2%

Stronger margins: For 3QCY07, GSK’s margins expanded by 1.6% YoY. The company witnessed a 25% YoY hike in skimmed milk price and 16% YoY hike in milk prices. However, due to its leadership position in the malted food segment, it was able to pass on the input price hikes to the consumers as evident form the 9% hike taken in product prices this quarter. Higher labour and advertisement costs though restricted the growth to that extent. The company has become a little more aggressive on the advertising and marketing front. It is also targeting rural areas with population of more than 5,000 people for its products. The company expects the ad spend to continue at current levels. For the nine-month period, the margins were at 19%. The management has planned for cost reduction techniques and innovations to improve the margins going forward.

Healthy bottomline: Higher operating margins coupled with higher other income and lower depreciation and tax rates led to the bottomline growth of 40% YoY for 3CY07. For the nine-month period, the bottomline was up 33% YoY. The tax rate reduced from 35.6% in 9mCY06 to 33.8% in the period.

What to expect?
At the current price of Rs 627, the stock is trading at a multiple of 12.5 times our CY09 earnings estimates. The company is constantly improving its sales performance and is also trying to increase its distribution reach across the northern and western regions. It is also heavily focusing on brand building. Further it has identified cost reduction strategies and has reduced the capex planned to that extent. We maintain our view on the stock from a long-term perspective.

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