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GSK Cons.: Operational efficiency boosts margins

Nov 12, 2011

GSK Consumer Healthcare Ltd has announced third quarter results of calendar 2011(3QCY11) results. The company has reported a 17.5% YoY and 31% YoY growth in sales and net profits respectively. Here is our analysis of the results

Performance summary
  • Sales grew by 17.5% YoY driven by robust demand for health food drinks (HFD) and biscuits. For 9mCY11, the topline increased by 15.9% YoY.
  • The company has managed to combat commodity inflation through cost control measures and expand operating margin by 90 basis points YoY. During 9mCY11, the operating margin has improved by 50 basis points.
  • At the net level, profit grew by a stellar 31% YoY backed by robust rise in operating income coupled with 78% jump in other income. The net profit for 9mCY11 was higher by 20% on a slower rise in operating income.

Financial Performance
Rs(m) 3QCY10 3QCY11 Change 9mCY10 9mCY11 Change
Revenue 6,330 7,446 17.6% 18495.6 21458.9 16.0%
Expenditure 5,175 6,021 16.3% 14800.6 17201.3 16.2%
Operating profit (EBDITA) 1,155 1,425 23.4% 3,695 4,258 15.2%
EBDITA margin (%) 18.2% 19.1%   20.0% 19.8%  
Other income 130 231 78.3% 330.5 536.7 62.4%
Interest 7 10 41.1% 19.2 25.9 34.9%
Depreciation 100 117 17.0% 288.1 338.9 17.6%
Profit before tax 1,178 1,530 29.9% 3,718 4,430 19.1%
Extraordinary inc/(exp) - -   - -  
Tax 392 499 27.3% 1253.4 1468.4 17.2%
Profit after tax/(loss) 786 1,030 31.1% 2,465 2,961 20.1%
Net profit margin (%) 12.4% 13.8%   13.3% 13.8%  
No. of shares (m)         42  
Diluted earnings per share (Rs)*         83  
Price to earnings ratio (x)*         32.31  
*trailing twelve months

What has driven performance in 3QCY11?
  • The company's sales grew by a robust 17.5% YoY led by 14% growth in turnover of its mainstay health food drinks (HFD) segment. Horlicks and its variants recorded growth of 18% led by 10% rise in offtake. Boost grew by 11.7% during the quarter. The food segment comprising of biscuits and noodles contributed 6% to overall sales. In this segment, biscuit sales grew by 18.5% and the noodles sales stagnated on account of supply-side issues. Region wise, all regions recorded double-digit growth during the quarter with the northern region leading the pack on a small base.

  • GSK Consumer Healthcare (GSKCH) has expanded operating profit margin notwithstanding steep commodity inflation in 3QCY11. This was made possible due to tight control on other operational expenses such as staff costs, adspends and other expenditure. Thus the 65 basis points YoY rise in cost of goods sold was more than offset by 96 basis points YoY fall in adspends. Even staff costs and other expenditure, as a percentage of sales, were down by 28-30 basis points each on a YoY basis. EBITDA margin was up by 90 basis points during the quarter.

  • At the net level, a 78% YoY jump in other income, mainly income from subsidiaries and interest income, coupled with 23% YoY rise in operational earnings translated into 31% surge in profits during the quarter. Consequently, the net margin was up by 140 basis points.

    Cost break-up
    As a % of sales 3QCY10 3QCY11 Change in basis points
    Cost of goods sold 36.0% 36.7% 64.83
    Staff costs 9.2% 8.9% -30.18
    Advertisement costs 17.0% 16.1% -95.97
    Other expenditure 19.5% 19.2% -28.11

What to expect?
At a price of Rs 2,673, the stock is trading at 25.6 times our estimated CY13 earnings. GSKCH continued to grow in double-digits backed by robust growth in HFD category and brisk demand for biscuits. The company's flagship brand Horlicks which contributes more than 50% to overall turnover has been extended to biscuits, noodles and cereal bars. In a latest move, GSKCH extended the brand equity to oats in the breakfast cereal market which will initially be launched in South India. As current valuations factor all these upsides, we advice ‘CAUTION' on this stock.

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