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SBCH: Uninterrupted growth but…

Nov 29, 2000

SmithKline Beecham Consumer Healthcare (SBCH) has reported satisfactory financial growth over the last three years. After the acquisition of Maltova and Viva, the company became the leader in the health food drink market. It enjoys a market share of over 70% with its leading brands Horlicks and Boost. The sheen of SBCH has not dimmed even during the slowdown in the economy and multiplying competition. Competition in the market for malted beverages failed to make a dent in the company’s markets share. In the past 3 years, SBCH’s profits have grown at a compounded annual growth rate (CAGR) of 21.6% while turnover witnessed a CAGR of 12.7%. The company’s profit margins are highest in the industry.

Financial Performance
Year ended December 31 9 months 3 years
(Rs m) 1998 1999 2000 CAGR
Sales 4,868 5,223 6,187 12.7%
Other Income 170 192 206 10.0%
Total Income 5,038 5,414 6,393 12.6%
Operating Profit 902 1,012 1,264 18.4%
Depreciation 61 75 106 32.3%
Profit Before Tax 841 956 1,123 15.5%
Tax 281 281 294 2.3%
Profit After Tax 561 675 829 21.6%

Key Ratios
Particulars 9m 98 9m 99 9m 00
Operating profit margins 15.0% 15.7% 17.1%
Tax / PBT 33.3% 29.4% 26.2%
Net profit margins 11.1% 12.5% 13.0%
Cash EPS (Rs) 18.21 21.97 27.40
EPS (Rs) 16.43 19.79 24.29
*9m – Nine months

However, during the third quarter ended September 2000, SBCH’s profit growth was affected by higher raw material prices (milk powder and milk fluid) and increase in promotional expenditure. The company’s excellent working capital management has enabled it to maintain its operating margins at the current level despite of increase in key costs.

SBCH has amongst the lowest ad spent to sales ratio in the industry. The interesting fact to note is that during the past five years its sales grew at a faster rate than the growth in the advertising expenses. This is remarkable in the scenario of stiff competition where the companies are forced to spend more on promotional expenses in order to boost sales volumes.

Sales outperforms ad spends
Particulars SBCH Cadbury Nestle Britannia HLL
5 yrs Advt. Exps CAGR 17.3% 29.1% 26.4% 35.9% 60.4%
5 yrs. Sales CAGR 18.4% 19.2% 11.6% 18.7% 31.7%
Advt. Exps as a % to sales 6.2% 10.2% 7.3% 6.8% 6.5%

At the current market price of Rs 417, SBCH is trading at a P/E of 17 times its December 2000 projected earnings with a market cap to sales ratio of 2.2 times. The reasons for the company’s lower valuations compared to its peers in the industry are concerns about its parent’s 100% subsidiary. This subsidiary owns the leading oral care brand ‘Aquafresh’ and anti allergic brand ‘Crocin’. Also the fact that its parent imposed a 3.5% royalty on sales for the use of its technology has not gone down well with the investors.

The investor community is also worried about the future of SBCH in India in light of the parent’s merger with Glaxo worldwide. In India Glaxo is known for its pharma focus and as such there is uncertainty on what it decides to do with SBCH. However, if any of the major FMCG companies like HLL, Nestle or Cadbury were to acquire SBCH from Glaxo, the stock could see a re-rating.

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