SBCH: Improvement signs… - Views on News from Equitymaster

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SBCH: Improvement signs…

Oct 25, 2002

GlaxoSmithKline Consumer Healthcare Ltd. (erstwhile SmithKline Beecham Consumer Healthcare) has posted a much better performance in September quarter, as compared to the June quarter. The malted beverage major reported a 4% growth in topline and finished the quarter with 15% dip in bottomline.

(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Net sales 2,223 2,319 4.3% 6,190 5,735 -7.4%
Other Income 99 35 -64.6% 252 115 -54.4%
Expenditure 1,744 1,844 5.7% 4,837 4,504 -6.9%
Operating Profit (EBDIT) 478 475 -0.7% 1,353 1,230 -9.1%
Operating Profit Margin (%) 21.5% 20.5%   21.9% 21.5%  
Interest (net) 28 21 -23.8% 44 16 -63.2%
Depreciation 34 93 175.7% 101 161 60.0%
Profit before Tax 515 395 -23.3% 1,461 1,168 -20.0%
Tax 233 107 -54.1% 490 364 -25.8%
Extraordinary items - (48)   - (48)  
Profit after Tax/(Loss) 283 240 -14.9% 971 757 -22.1%
Net profit margin (%) 12.7% 10.4%   15.7% 13.2%  
No. of Shares (eoy) (m) 45.4 45.4   45.4 45.4  
Diluted Earnings per share* 24.9 21.2   28.5 22.2  
*(annualised)            
Current P/e ratio   13.3     12.7  

The company had posted shocking results in June quarter. SBCH posted a never before 26% decline in the topline in 2QFY03. This resulted in the margins getting squeezed and the company finally finished the quarter with a significant 45% dip in bottomline. The company attributed this dip to an inventory correction as well as delay in commissioning of its new plant in Sonepat, which effectively meant a delay in improvement of efficiencies.

The company managed to just about stop an operating margin slide, but higher depreciation (Rs 59.4 m) on account of the new Sonepat plant (got commisioned in July 2002), slide in other income, as well as extraordinary expenses towards VRS (Rs 41.4 m) and restructuring, saw profits decline by 15% during 3QFY03. The company has closed its packing operations in Kolkata with affect from August 31, 2002.

Cost break-up
(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Stock (5) 197 - (100) 83 -
RM 783 666 -14.9% 2,256 1,850 -18.0%
Finished goods 12 22 93.0% 43 55 26.5%
Staff cost 182 217 19.2% 527 617 17.1%
Advertising 194 250 28.9% 535 602 12.4%
Other exps 554 454 -18.0% 1,502 1,200 -20.1%
Patent and trademark 12 25 99.2% 37 61 66.6%
Def. Rev. exps. 13 13 0.0% 37 37 0.8%
Total 1,744 1,844 5.7% 4,836 4,504 -6.9%

Please note for the comparision on a YoY basis, we have taken numbers that had been stated by the management last year. The company seems to have restated some numbers, as a result of which the bottomline dip during September quarter is coming to 12.3% (as opposed to 15% shown in the table). We haven't received the company's press release and consequently, are showing the comparision based on the numbers made available last year.

The poor results in June quarter had shaken investor confidence towards the counter. GlaxoSmithKline Consumer anyway never got higher valuations owing to its one product category focus. The parent's other 100% subsidiary was always a cause for concern. But the blip in quarterly results saw the stock price lose a significant market cap.

The stock is trading at Rs 282, a P/E of 12.7x annualised 9mFY03 earnings. Though the performance has brought some relief to investors, a full fledged recovery in the company's fortunes seems still some time away. The company's statement: "Due to the recessionary trends still prevailing in the malted food industry the capacity utilisation of the plant (Sonepat) has been below the forecast level", gives an indication of the difficult market conditions for SBCH. Having said that, GlaxoSmithKline Consumer has traditionally had a stable business growth and on the longer term we remain positive on the company's progress.


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