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GSK Consumer: Strong volume growth continues - Views on News from Equitymaster
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GSK Consumer: Strong volume growth continues
Oct 27, 2008

Performance summary
  • Topline grows by 21% YoY and 22% YoY respectively in 3QCY08 and 9mCY08, led by growth in key brands.

  • Operating margins dented by 4% in 3QCY08 and 2.5% in 9mCY08.

  • Net profit for 3QCY08 improves marginally by 5% mainly on account of lower margins.

  • The board has declared an interim dividend of Rs 10 per share (dividend yield of 1.7%)

Rs m 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
Net sales 3,534 4,258 20.5% 10,007 12,195 21.9%
Expenditure 2,839 3,594 26.6% 8,051 10,121 25.7%
Operating profit 694 664 -4.4% 1,956 2,074 6.0%
Operating margins (%) 19.6% 15.6%   19.5% 17.0%  
Other Income 191 232 21.3% 443 612 38.1%
Interest (net) 12 14 12.9% 34 39 15.5%
Depreciation 110 104 -5.1% 327 313 -4.2%
Profit before Tax 763 778 1.9% 2,039 2,334 14.4%
Tax 258 247 -4.1% 688 776 12.9%
Profit after Tax/(Loss) 505 530 4.9% 1,352 1,558 15.2%
Net profit margin (%) 14.3% 12.5%   13.5% 12.8%  
No. of Shares (m) 42.1 42.1   42.1 42.1  
Diluted Earnings per share (Rs)*         43.6  
Current P/e ratio         13.6  
*12 months trailing earning

What has driven performance in 3QCY08?
  • GSK Consumers reported a 20.5% YoY and 22% YoY growth in the topline for both the periods under consideration. The quarter witnessed 16% YoY volume growth and 4% YoY growth in realisation due to price hikes. While the sales of Horlicks grew by 20% YoY, Boost saw a 5% YoY jump in the quarter. The company’s new offerings ‘Women Horlicks’ and ‘Actibase’ are performing in line with management expectations. The biscuits portfolio grew by 20% YoY mainly led by volume growth. This segment currently contributes around 6% to the total revenue, which is expected to touch 10% by 2010. The management sees 8% YoY volume growth and 4% to 5% YoY realisation growth being sustainable going forward. It aims is to increase penetration levels both by way of increasing consumers and also consumption levels.

    Cost break-up
    As a % of net sales 3QCY07 3QCY08 9mCY07 9mCY08
    Total Cost of goods 35.1% 39.9% 35.1% 38.6%
    Staff Cost 11.3% 10.7% 11.4% 10.6%
    Advertising 13.2% 11.3% 12.9% 12.7%
    Other Expenditure 20.9% 22.5% 21.1% 21.1%

  • The operating margins were dented by 4% in 3QCY08 and 2.5% in 9mCY08. While lower staff and other expenses provided some relief, the company continues to face inflationary pressure in its input costs. All its raw material prices (milk, milk powder, malt & malt extract) have continued spiraling upwards. The management expects around 10% to 15% inflationary pressure.

  • Net profits for 3QCY08 improved by 5% mainly on account of lower operating margins inspite on strong topline growth. During 9mCY08, the profits jumped 15% YoY inspite of lower operating margins mainly due to higher other income (which was up 38% YoY) and lower depreciation. The net margins are in line with our expectations.

What to expect?
    At the current price of Rs 592, the stock is trading at a multiple of 11.2 times our CY10 earnings estimates. GSK Consumers is planning to leverage the Horlicks brand and launch new products by CY09. It is also planning to bring products from its parent brand and also target the bottom of pyramid consumers by next year. It has plans to increase its capacity and to improve quality and productivity of the company. The company has capex plans to the tune of Rs 550 m during the current year of which Rs 400 m is already invested. For CY09 it is looking at further investing Rs 1.5 bn for capacity expansions. While inflationary and competition risk may be a concern, strong brand equity, low penetration levels, strong balance sheet and market leadership makes it a strong play in he sector. The company is looking at doubling its sales in next 4 years. We continue to be positive on the stock.

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