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GSK Consumer: Looking for rhythm

Oct 25, 2004

Performance summary
GSK Consumer Healthcare has reported 3% revenue growth during the third quarter ended September 2004. The company margins have improved significantly, thereby resulting in a 37% bottomline growth during the quarter. For the nine months ended September 2004, GSK has reported almost 8% revenue and around 7% bottomline growth.

(Rs m) 3QCY03 3QCY04 Change 9mCY03 9mCY04 Change
Net sales 2,281 2,350 3.0% 6,074 6,552 7.9%
Expenditure 1,986 1,928 -2.9% 5,048 5,446 7.9%
Operating Profit (EBDITA) 295 422 43.2% 1,026 1,106 7.8%
EBDITA margin (%) 12.9% 17.9%   16.9% 16.9%  
Other income 47 30 -36.1% 149 104 -30.2%
Interest (1) (3) 85.7% 5 -20 -476.9%
Depreciation 87 90 4.2% 269 268 -0.2%
Profit before Tax 257 364 42.0% 900 961 6.7%
Tax 87 138 58.4% 309 354 14.6%
Extraordinary income/(expense) (5) - - (22) - -
Profit after Tax 165 226 37.3% 569 607 6.6%
Net profit margin (%) 7.2% 9.6%   9.4% 9.3%  
No. of Shares (m) 45.4 45.4   45.4 45.4  
Diluted Earnings per share (Rs)* 14.5 19.9   16.7 17.8  
Price to earnings ratio (x)         14.1  
*(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 to 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’ and ‘Crocin’ in OTC portfolio. It recently also took up marketing of ‘Iodex’ for GSK Pharma.

What has driven performance in 3QCY05?
Sales:  The company is still unable to find a rhythm in its revenue trend. It still seems to be struggling and is yet to stabilise. Its revenue trend has been very volatile over the last seven quarters (see chart). GSK Consumer has provided no indication of how the malted beverage segment is growing, but we believe that the segment growth has slowed from its earlier average of 10% plus rate over the past decade.

Operating margins:  One of the key reasons for the company reporting strong bottomline growth is the significant improvement in operating margins (up 5% YoY). This has come about as a result of a dip in advertising expenses as a percentage of sales, as well as its raw material costs. Also, the third quarter of last year was abnormally bad for the company, thus showing a higher base improvement this year. During the nine month period however, GSK's margins have remained stable.

Cost break-up
as a % of net sales 3QCY03 3QCY04 9mCY03 9mCY04
Stock 3.3% 1.5% -0.9% 1.0%
RM 34.5% 32.4% 36.0% 35.0%
Finished goods 1.2% 1.3% 1.0% 1.0%
Staff cost 10.0% 10.2% 10.5% 10.8%
Advertising 14.4% 12.5% 11.5% 11.0%
Other exps. 22.1% 23.0% 23.3% 23.2%
Patent and trademark 1.1% 0.5% 1.2% 0.5%
Def. Rev. exps. 0.5% 0.5% 0.6% 0.6%
Total 87.1% 82.1% 83.1% 83.1%

What to expect?
The management has declared a second interim dividend of Rs 3.7 per share, taking the total interim dividend for 2004 to Rs 7 per share. The stock is trading at Rs 252, reflecting a P/E of 14.1 times annualised 9mCY04 earnings and market cap to sales of 1.3x. GSK Consumer has no doubt made some progress in reversing the decline in topline over the past few quarters. However, market conditions continue to be difficult for this single product company. A full fledged recovery in the company's fortunes still seems some time away and therefore, we view the company cautiously.


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