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GSK Cons.: Slow offtake keep margins flat - Views on News from Equitymaster
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GSK Cons.: Slow offtake keep margins flat
Dec 2, 2014

GSK Consumer Healthcare Ltd has announced second quarter results of financial year 2014-15(2QFY15) results. The company has reported a 11% YoY growth in sales and 9% YoY rise in net profits. Here is our analysis of the results

Performance summary
  • GlaxoSmithKline Consumer Healthcare (GSKCH) clocked a topline growth of 9.8% in 2QFY15 on the back of 9% higher realizations.
  • Operating margin contracted by 1.4% due to steep rise in input costs and other expenses.
  • At the net level, margins remained flat due to higher other income earned during the quarter.

Standalone Financial Snapshot
Rs(m) 2QFY14 2QFY15 Change
Revenue 10,141 11,136 9.8%
Expenditure 8,221 9,179 11.7%
Operating profit (EBDITA) 1,920 1,957 1.9%
EBDITA margin (%) 18.9% 17.6% -1.4%
Other income 434 619 42.6%
Interest 1 2 35.7%
Depreciation 116 121 4.8%
Profit before tax 2,237 2,453 9.6%
Extraordinary inc/(exp) - -  
Tax 768 850 10.7%
Profit after tax/(loss) 1,469 1,603 9.1%
Net profit margin (%) 14.5% 14.4% -0.1%
No. of shares (m)     42
Diluted earnings per share (Rs)*     129
Price to earnings ratio (x)*     44.21
*trailing twelve months

What has driven performance in 2QFY15?
  • GSKCH clocked a 10% topline growth. However, the entire growth has come from realizations that were up by 9% during the quarter. Offtake continued to remain sluggish as volumes were up by a mere 2%. Each of the Health Food Drinks (HFD) segment and the food segment, comprising of biscuits, noodles and oats, recorded a growth of 11% during the quarter. The company re-launched Horlicks during the quarter with instant miscibility.

  • However, operating margin remained depressed due to faster rise in input costs. As a proportion of sales, the cost of goods sold was up by 1.5% whereas other expenses were up by 0.4%. The impact was partially neutralized by reduction of 0.2% and 0.4% in ad-spends and employee costs (both as proportion of sales), respectively.

  • At the net level, the company has been able to keep margins at around 14.4% aided by a 43% jump in other income. The tax incidence increased to 34.6% in 2QFY15 from 34.3% in 2QFY14.

    Cost break-up
    As a % of sales 2QFY14 2QFY15 Change in basis points
    Cost of goods sold 35.6% 37.1% 154.73
    Staff costs 9.2% 9.1% -17.91
    Advertisement costs 16.1% 15.7% -36.01
    Other expenditure 20.2% 20.5% 35.29
What to expect?

Slowdown in discretionary spending has hit the volume growth of GSKCH. The company has undertaken new marketing initiatives to boost sales of its mainframe Horlicks brand. GSKCH is also expanding its distribution reach and hopes to add 1 m outlets to its network in the next 12-18 months. The company expects to reach normalized volume growth of 5-6% in a timeframe of 6-9 months.

We had given a Sell on the stock. At a price of Rs 5696, the stock is trading at 32 times our estimated FY17 earnings.

At current price levels, the stock remains overpriced and we re-iterate a SELL on the stock.

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