GSK Consumer: Boost from volumes

However, higher expenses, which analysts attribute to the creation of new capacities, curtail profit growth

GlaxoSmithKline Consumer Healthcare (GSK Consumer)’s  performance for the September quarter was good and largely in line with expectations. The good part is despite the weak demand environment, volume growth was strong, which helped its topline increase 17.4 per cent year-on-year to Rs 972 crore. However, increased ad spends and other expenses resulted in earnings before interest, tax, depreciation and amortisation (Ebitda) margin contraction, in contrast to analysts’ expectations. Net profit at Rs 147 crore, up 14.3 per cent year-on-year, though came in line with expectations as other income surged and tax rate was marginally lower than expectations.

While analysts expect the company to post healthy performance, the stock valuations are not cheap. The  scrip trades at 34 times CY14 estimated earnings, higher than its historical one-year forward average price/earnings of 28-29 times. Thus, most analysts believe the near-term upsides are limited.

Abneesh Roy, associate director, institutional equities, research, Edelweiss Securities, says, "GSK posted a good set of numbers, given the slowing environment and weak show by peers such as Nestle and HUL. Discretionary slowdown is not reflected in the performance. We like GSK’s ‘health and wellness’ positioning, bolstered by a strong brand image of Horlicks. We have a hold call on the stock due to high valuations".

Of the 11 analysts polled by Bloomberg since September, six have a sell rating, four hold and one buy. Their average target price is Rs 4,229. It shows a 11 per cent downside from Wednesday's closing price of Rs 4,754.

Strong volume growth
Operationally, GSK did well. While Horlicks and Boost (94 per cent of domestic revenues) are seeing continued traction, food segment is also showing good growth. The company, which launched Boost Choco Nut in July, saw the biscuits and oats’ sales grow 20 per cent for each during the quarter.

Overall volume growth (including exports) was 12 per cent, with price increases contributing just five per cent. The domestic business (93 per cent of total revenues) volumes grew 10 per cent, highest in six quarters. GSK last saw double-digit volume growth in the December 2011 quarter, 12 per cent. Since then, this metric has moved between six and eight per cent. Strong performance of Horlicks and Boost (which grew 16 per cent and 19 per cent year-on-year, respectively) fuelled overall growth. This portfolio maintained its leadership position, with 65.2 per cent volume market share, ahead of the 16.8 per cent market share of its closest peer.

  Auxiliary sales (Sensodyne, Crocin, etc) growth was robust at 39.7 per cent to Rs 42 crore in the quarter and was driven by market share gains in the sensitive segment, say analysts. Notably, GSK’s gross margin expanded 15 basis points to 62.9 per cent in the quarter. These gains, however, got offset by the increase in other expenses, which, as a percentage of sales expanded 141 basis points to 21.1 per cent. Employee costs, too, increased 28 basis points to 9.6 per cent, while advertising expenses went up six basis points to 16.8 per cent as a percentage of sales. As a result, the Ebitda margin was 15.4 per cent, down 159 basis points year-on-year, versus 17 per cent estimated by analysts.

"Results were slightly disappointing on the operating front due to Ebitda margin contraction. Higher other expenses have put margins under pressure", says V Srinivasan, fast-moving consumer goods analyst, Angel Broking.

This increase in costs can be attributed to new capacities going on stream as well as the focus on driving volumes and, hence, not really a worry given the volume growth: Domestic volume growth at 10 per cent was better than the six-seven per cent analysts had expected. This could be why the stock closed 2.5 per cent higher on Wednesday after results.

At the net level, profit growth was pulled down by higher depreciation expenses (up 50.4 per cent to Rs 12 crore) towards the new plant commissioning. Higher other income (up 57.1 per cent to Rs 43 crore), however, aided bottom line growth. While tax rate increased 188 basis points to 34.3 per cent, it was lower than expectations — MOSL analysts were estimating it at 35.5 per cent.

Prospects remain healthy and analysts believe a higher focus on rural markets could help sustain growth.