GSK Consumer: Muted volumes, higher costs impact Q1 show

The impact of weakening domestic consumer demand also reflected on the June quarter results of GlaxoSmithKline Consumer Healthcare (GSK Consumer), which missed street expectations on many fronts.

While subdued volume growth (lowest over past three years) hit the company's domestic sales, its exports (six per cent of sales) were marred by one-offs and slowing demand in Bangladesh. Costs also increased faster and impacted profits. Thus, GSK Consumer's net sales (Rs 922 crore; up eight per cent year-on-year, the slowest growth in over five years) and net profit (Rs 130 crore; up 8.5 per cent), missed Bloomberg consensus estimates of Rs 1,002 crore and Rs 138 crore, respectively.

In the June quarter, health food drinks (HFD) category grew at slowest pace in six quarters according to research firm - AC Nielson. For GSK Consumer as well, the three per cent volume growth was not only below analysts' expectations of seven to eight per cent, but was also below its own volume growth trend of 7-11 per cent in the past four quarters. Domestic sales though grew 10 per cent, aided by higher realisations. The good part is that GSK Consumer, which enjoys a leadership position in this segment, increased its market share by 120 basis points.

The company's foods business (noodles, oats and biscuits) posted strong growth of 32 per cent albeit on a smaller base. Oats fuelled the show as it gained 410 basis points market share in this segment and remains the number two player in India's southern region. Fee income earned from sale of over the counter products (Crocin, Eno, Iodex) also grew 18.8 per cent year-on-year to Rs 44 crore, though in line with the trend seen in recent quarters. In its bid to diversify, the company plans to step up share of foods/non-HFD products from five per cent to 15 per cent of total revenues over the next two to three years, say analysts.

But, higher than market growth came at a cost. On the margin front, gross margin fell sharply by 290 basis points to 63.6 per cent due to higher costs of key input milk/milk products, indicating the company did not fully pass on the higher costs to consumers. GSK Consumer, however, managed to restrict the Ebitda margin contraction to 49 basis points at 17 per cent. Lower staff costs (down 81 basis points to 10.9 per cent of sales) and other expenses (down 78 basis points to 21 per cent) provided some cushion. Interestingly, GSK also managed to keep a tab on ad spends, down 81 basis points to 14.6 per cent of sales, even as it relaunched Horlicks variants (like women, lite and chocolate) with new marketing initiatives.

But, ad spends could rise given that competitive intensity is likely to go up and the company will have to protect its leadership position in HFD as Heinz (Complan brand) is aiming to double its market share from 12 per cent over the next two years. This could keep GSK Consumer's Ebitda margins under check, believe analysts.

While urban India forms 90 per cent of GSK Consumer's domestic revenues, making it a play on urban recovery which is likely to be gradual and with a lag effect, the company is also focusing on rural markets.

"To boost rural growth, GSK has been increasing its rural network and is introducing new and relevant products at lower price points," say Edelweiss Securities analysts.

Strong brand identity (Horlicks), leadership position (65.1 per cent volume market share) and good pricing power in the HFD category are GSK Consumer's key positives, and will help in the long run. However, given that the consensus target price of analysts polled by Bloomberg recently is near current levels, the upsides are minimal.