X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
GSK Cons: The One Product Wonder - Outside View
 
 
GSK Cons: The One Product Wonder

Glaxo Smithkline Consumer Healthcare (GSKCH) is a one product wonder of sorts. It also boasts an impeccable balance sheet and in all probability the company faces a most promising future-if only it can continue to flog the brand equity of its product line at the same pace. It is also a classic illustration of a one product company which has been able to stand tall all these years-albeit in an ever growing market for its product. With increasing prosperity in the hinterland the brand has only one way to go.

It is a plodder of sorts in a manner of speaking - after 51 years of operations it clocked a gross turnover of Rs 20 bn for the 12 months ended Dec 2009. Turnover growing from Rs 9 bn in the year 2000 to Rs 20 bn for the latest accounting year with net profit growing more slowly from Rs 1 bn to Rs 2 bn respectively. Net profit however took a beating between 2002 and 2004.Its fortunes in a sense are also inextricably tied to the success or failure of the monsoons.At least this is the conclusion from a reading of its past working results. It has chosen to partly tackle this problem by exporting to the immediate neighborhood, though its principal export markets are probably off its radar screen due to the parent's dictates.

Leaving out its few sidekick brands, Boost, Maltova and Viva, which are mere variations of its top selling brand, it is the top gun Horlicks brand that brings home the bacon at the end of the day. The Directors' report also chortles with delight the distinction that Brand Horlicks was top of the charts in the beverages category as India's most trusted beverages brand in 2009.

The company on its part stepped on the throttle and spent a cool Rs 3 bn plus on sustaining the brand in 2009 -up from the Rs 2 bn that it spent in the preceding year. That in a sense is one of the entry barriers that a prospective competitor will face if it seeks to challenge the company.It also has plenty of moolah to fight off the competition if you please.

The company also makes feeble attempts ever so often to increase its product range by leveraging the Horlicks brand as it did recently by launching biscuits, chocolates and now noodles --through third party manufacturing. But such a diversification may as usual may come to nought if the past is any indication.There is entrenched competition here you see.

It also says something of the quality of the Horlicks brand offering that no heavyweight FMCG company has been able to encroach on its territory - in the growing child nutrient segment. There is further proof of its hold in the market. It commands a stranglehold on the retail trade for its product range by literally selling cash down and in the process saving substantially on working capital costs.

The companies three plants are flogged close to capacity even after the recent capacity addition - but with no indication in the directors' report on its future course of action. Lots of platitudes about the performance but no direction. All the more perplexing, as the directors' report waxes eloquent on the future prospects of the food processing industry in India - to which category it belongs.

With the company generating ever increasing cash resources and with no 'safe' hideout to profitably park these funds, it boasted cash and bank balances of over Rs 8 bn at year end. The conservative board appears to have run out of ideas, apparently on the sage advice meted out by its parent board. If this trend continues 'other income' will in future add considerably to its bottomline. In the context of the surging cash balances, the company has paid Rs 43 m as interest expenses during the year which appears perplexing.

The only question mark appears to be the relatively high gross fixed asset base relative to its gross turnover. In 2009 the turnover generated was 3.4 times though considerably higher than the low of 1.7 times recorded in 2002. FMCG companies normally generate high turnover to gross block ratios due to the comparatively low outlay on capital equipment and the production volumes that it generates, but this could also be skewed because many FMCG cos outsource their products through third party manufacturing. GSKCH believes in making the 'high funda' mainline products that it sells.

The directors' report is about as bland as it can get, barring self congratulatory statements about the phenomenal success of its R&D dept in the company's outstanding performance. The biggest beneficiary of the Indian R&D's success is the parent which took home a cool Rs 700 m in royalty payments in 2009. Add to it the generous dividends (180% for the latest year) that the parent pockets from its 43% shareholding and the parent is a clear winner by a mile. Needless to add almost the entire paid up equity of Rs 420 m consists of bonus shares and, besides, the company is more than over-ripe for a most generous bonus issue given that it reserves and surplus is in excess of Rs 9 bn at year end.

With returns like this who needs diversification or expansion of any sorts? The Indian business must easily rank as the parent's most profitable investment anywhere - by a long mile at that.

The company however elicits very little interest in the secondary stockmarkets and it definitely could do with some PR help here. Its PE discounting is far lower than that of Nestle for example.

Disclosure: Please note that I am a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
Equitymaster Agora Research Private Limited

 

Equitymaster requests your view! Post a comment on "GSK Cons: The One Product Wonder". Click here!

  
 

More Views on News

GSK Consumer: On the Recovery Path (Quarterly Results Update - Detailed)

Jun 20, 2017

While GSK consumer reported muted revenue growth, volumes are seen to be recovering.

GSK Consumer: Price Hike Hurts Volumes (Quarterly Results Update - Detailed)

Nov 30, 2016

GSK Consumer Healthcare declared results for the quarter ended September 2016. The revenues dropped by 1.3% during the quarter as compared to a year ago; while the profits declined by 16.6% YoY during the quarter.

GSK Consumer: Slowdown in demand impacts sales (Quarterly Results Update - Detailed)

Oct 5, 2016

GSK Consumer Healthcare has announced the first quarter results of the financial year 2016-2017 (1QFY17). The company's sales declined by 1.4% YoY while net profit rose by 2.9% YoY during the quarter.

GSK Consumer: A Forgetful Year (Quarterly Results Update - Detailed)

Jun 1, 2016

GSK Consumer Healthcare announced its results for the quarter and year ended March 2016. During the quarter, sales and profit came in lower by 9% YoY and 8% YoY respectively.

GSK Consumer: Feeling the Growth Pressures? (Quarterly Results Update - Detailed)

Feb 15, 2016

GSK Consumer Healthcare announced its results for the quarter ended December 2015. While revenues were up by 2% YoY, profits were higher by 37% YoY.

More Views on News

Most Popular

Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

Aug 7, 2017

The data tells us quite a different story from the one the government is trying to project.

A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

Aug 10, 2017

Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

Aug 7, 2017

Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

More
 

Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

GSK CONSUMER SHARE PRICE


Aug 18, 2017 (Close)

TRACK GSK CONSUMER

  • Track your investment in GSK CONSUMER with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

GSK CONSUMER 5-YR ANALYSIS

Detailed Financial Information With Charts

COMPARE GSK CONSUMER WITH

MARKET STATS