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GSK Consumers: Nourishing quarter! - Views on News from Equitymaster
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GSK Consumers: Nourishing quarter!
Oct 27, 2006

Performance summary
Malted beverage major, GSK Consumers (GSK) announced its results for the third quarter ended September 2006 (January-December fiscal) late yesterday. The company reported a 16.5% YoY growth in net sales for 3QCY06. However, operating margins contracted on the back of pressure on the raw material costs front. Despite this, bottomline growth outpaced topline growth during the quarter due to higher other income and reduction in interest costs. The company has also declared an interim dividend of Rs 10 per share (dividend yield of 2%).

Rs m 3QCY05 3QCY06 Change 9mCY05 9mCY06 Change
Gross sales 2,906 3,291 13.2% 8,206 9,254 12.8%
Less : excise duty 319 276 -13.5% 961 782 -18.6%
% of sales 11.0% 8.4%   11.7% 8.5%  
Net sales 2,587 3,015 16.5% 7,245 8,472 16.9%
Expenditure 2,049 2,486 21.4% 5,786 6,902 19.3%
Operating profit 538 528 -1.8% 1,459 1,570 7.6%
Operating margins (%) 20.8% 17.5%   20.1% 18.5%  
Other Income 47 139 194.7% 167 353 111.1%
Interest (net) 12 10 -14.8% 33 26 -20.5%
Depreciation 108 109 1.1% 312 318 2.1%
Profit before Tax 465 548 17.7% 1,281 1,577 23.1%
Tax 162 185 14.0% 423 561 32.5%
Profit after Tax/(Loss) 303 362 19.7% 858 1,016 18.5%
Net profit margin (%) 11.7% 12.0%   11.8% 12.0%  
No. of Shares (m) 42.1 42.1   42.1 42.1  
Diluted Earnings per share (Rs)*         29  
Current P/e ratio         17.5  
*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 4-5% 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, and ‘Eno’, ‘Iodex’ and ‘Crocin’ in OTC portfolio.

What has driven performance in 3QCY06?
‘Horlicks’ kick: Strong sales performance of Horlicks, Boost and other products led to a 16.5% YoY growth in the topline in 3CY06. Its flagship brand ‘Horlicks’, witnessed double-digit growth driven by new advertising, packaging innovation and effective consumer promotions. The biscuit segment also aided revenue growth. As earlier, GSK continues to introduce new variants and flavours in a bid to pep up growth, which is likely to help its topline in the future.

Margins under pressure: Margins for the period under consideration have declined by 330 basis points. The main culprit for the decline was the higher raw material costs (as a % of sales). Higher advertising costs and other expenses have also put pressure on margins. The decline in excise duty as a percentage of sales was due to the company’s Baddi plant, that enjoys certain excise benefits and which contributes nearly 60% to the total turnover.

Cost break-up
As a % of net sales 3QCY05 3QCY06 9mCY05 9mCY06
Total Cost of goods 36.3% 37.3% 33.6% 34.9%
Staff Cost 10.8% 10.9% 11.5% 11.1%
Advertising 11.0% 12.1% 12.4% 12.9%
Other Expenditure 21.1% 22.2% 22.3% 22.5%

Bottomline view: Bottomline growth (up 19.7% YoY) outpaced topline growth during the quarter backed by higher other income and lower interest costs. Thus, despite a drop in operating margins, net profit margins have expanded by a modest 30 basis points.

What to expect?
At the current price of Rs 510, the stock is trading at a price to earnings multiple of 17.5 times its 12-month trailing earnings. Its key brands continue to exhibit consistent growth due to new variants and promotion initiatives taken by the company. However, the current valuations seem to reflect the company’s growth prospects from a medium term perspective and as such we advise investors to exercise caution at the current juncture.

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