GSK Cons.: Demand boosts topline - Views on News from Equitymaster

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GSK Cons.: Demand boosts topline

Nov 3, 2010

GSK Consumer Healthcare Ltd has announced its 3QCY10 results. The company has reported a 24% YoY and 31% YoY growth in sales and net profits respectively. Here is our analysis of the results

Performance summary
  • The company has seen strong sales with growth of 24.6% YoY for 3QCY10.
  • Operating (EBITDA) margins for the company dipped slightly to 18.2% (as a percentage of sales) for the quarter.
  • Bottom line for the quarter grew by 30.9% YoY on the back of higher operating income, increase in other income and fall in interest costs partly offset by increase in effective tax rates.
  • For 9mCY10, the company's net profits increased by 23.8% YoY while the net profit margins grew by 0.5% to 13.3%. This performance comes on the back of increase in operating income, higher other income, fall in interest as well as depreciations costs and lower effective tax rates.

Rs(m) 3QCY09 3QCY10 Change 9mCY09 9mCY10 Change
Net sales         5,103         6,330 24.1%      15,501      18,496 19.3%
Expenditure         4,163         5,175 24.3%      12,290      14,801 20.4%
Operating profit (EBDITA)  940         1,155 22.9%         3,211         3,695 15.1%
EBDITA margin (%) 18.4% 18.2%   20.7% 20.0%  
Other income 59  130 119.3%  204  331 62.3%
Interest 10   7 -28.4% 33 19 -40.9%
Depreciation  105  100 -5.1%  316  288 -8.9%
Profit before tax  883         1,178 33.3%         3,066         3,718 21.3%
Extraordinary inc/(exp) -   -     -   -    
Tax  283  392 38.4%         1,075         1,253 16.6%
Profit after tax/(loss)  600  786 30.9%         1,991         2,465 23.8%
Net profit margin (%) 11.8% 12.4%   12.8% 13.3%  
No. of shares (m) 42 42   42 42  
Diluted earnings per share (Rs)*         66.6  
Price to earnings ratio (x)*         33.5  
*trailing twelve months

What has driven performance in 3QCY10?
  • The company witnessed strong sales growth in 3QCY10 on the back of robust volume growth in Horlicks and Boost. This comes on the back of new product innovations and higher spending towards brand building.

    Cost break-up
    As a % of sales 3QCY09 3QCY10 9mCY09 9mCY10
    Raw material 36.6% 36.0% 36.9% 37.1%
    Staff costs 10.0% 9.2% 9.9% 9.1%
    Advertisement costs 15.8% 17.0% 13.9% 15.2%
    Other expenditure 19.2% 19.5% 18.5% 18.6%

  • The company increased its spending on brand building during the quarter. As a result, advertisement costs increased by 1.2% to 17% (as a percentage of sales), resulting in fall in operating margins. However, raw material costs and staff costs fell during the quarter. While raw material costs fell by 0.6% to 36% during the quarter, staff costs fell by 0.8% to stand at 9.2% (both as a percentage of sales). This provided some support to the operating margins.

  • Net profit grew by 30.9% YoY during the quarter. This was a result of growth in operating income, higher other income and lower interest expense partly offset by higher effective tax rate. The effective tax rate increased from 32% in 3QCY09 to 33% in 3QCY10.

What we expect?
At Rs 2,215, the stock is trading at 26.6 times our estimated CY12 earnings. The company's products have been facing good traction with biscuits growing quite sharply. The company's newly launched noodles 'Foodles' have garnered a market share of 4% in the east India markets in addition to 5% in south India markets. The company also stands to benefit from its flagship brands as the market is still largely under penetrated, allowing good head room for growth. Given the company's potential for growth, we believe this is a good stock for long term investment. However, high food inflation can be a dampener for the company's growth. Nevertheless, given the high price of the stock, we believe that valuations are expensive and advice 'CAUTION' on this stock.

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