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FMCG: Best and the worst

Dec 28, 2010

As 2010 draws to a close, we decided to take a look at the best and the worst performing stock in the consumer goods space.

Best Performer: GSK Consumer (up 66% YoY)

GSK Consumer had an eventful 2010. The maker of Horlicks and Boost tried its hands at new products with some success. The company’s biscuits under the Horlicks brand continue to perform well. At the same time, its newly launched noodles under the brand name "Foodles" gained 4% market share in the east India markets in addition to 5% in south India markets. The top line of GSK in the first 9 months grew by 19.3% YoY on strong volume growth. In spite of food inflation, the company was able to control its costs and invest behind brand building. Due to heavy spending on advertisement, the company’s operating margins fell by 70 basis points and stood at 20% (as a percentage of sales). However, as a result of higher other income and lower interest costs due to better management of its creditors, the company was able to grow its bottom line by 24% YoY.

The company is in a sweet spot. Its core products are in an under penetrated category while it is using its already established brands to launch new products. Furthermore, the company is able to manage its working capital in a much better manner. This has given the company surplus cash. Going forward, the company is expected to continue to perform well on the back of its health platform.

Worst performer: Procter & Gamble Hygiene & Health Care (up 1% YoY)

Procter & Gamble Hygiene & Health Care or PGHH had a lacklustre year. The maker of Vicks and Whisper sanitary napkins had to take price cuts and face the burden of excise duty levied on sanitary napkins during the year. As a result, the top line of the company over the first 9 months grew by 8% YoY. This was mainly on the back of volumes. The company also had to face rising raw material costs which put pressure on its margins. Besides higher raw material costs, the company faced margin pressure due to increase in advertisement spending. As a result, the company’s operating profit fell by 40% YoY. The company during the year shifted some of its manufacturing to tax exempt zone. As a result, its effective tax rate fell sharply. Due to this fall in effective tax rate, the company’s bottom line (down 36% YoY) did not fall as much as it’s operating profit.

PGHH is in a sweet spot as the market for sanitary napkins is under penetrated and fast growing. Due to the excise duty levy, the company’s business was shaken resulting in a dismal performance. However, once the base effect is neutralised, the company is expected to grow in high double digits with margins returning to their historical levels.

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