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GSK Consumer Healthcare’s company commentary seems to suggest a stable demand environment, but higher investment in A&P could put margin progression under risk in CY13, says Nomura
GSK Consumer Healthcare’s results for the first quarter of the calendar year 2013 were in line with estimates at the topline and PAT level, but EBITDA margins were down y-o-y, which is a disappointment given strong gross margin performance y-o-y. Volume growth for the quarter was 8%, which is a positive and management expects to maintain this trajectory going forward. Company commentary seems to suggest a stable demand environment, but higher investment in A&P could put margin progression under risk in CY13. These observations were made by Nomura Equity Research in its Quick Note on the company’s performance.
According to Nomura, GSKCH’s revenues were up 16.6% y-o-y, in line with the brokerage’s expectation. Volume growth was 8% for the quarter. Gross margins were up 300 basis points (bps) y-o-y, which is a positive, but higher employee costs and other overheads led to EBITDA margins coming in lower than expectations. EBITDA margins were down 80 bps y-o-y to 21.2% compared to Nomura’s expectation of a 50 bps growth y-o-y. A&P to sales ratio came in at 16.9%, in line with Nomura’s expectation and the company’s guidance for the longer term of 16%-17%.
The company’s management is guiding for volume growth of 7%-8% for the year, which means its expectation of the demand environment is stable for the rest of the year. The management is guiding for A&P to sales ratio of 16-17%, but did say that if it sees benefits from gross margins, it would be looking to increase its spend on brand building and promotions.
For the reporting quarter, Horlicks’ volume growth was 7% and Boost volume growth was 10%. Overall Malted Foods category volume growth was 8%. The management expects overall inflation for the year to be 4%-5%, but does not see this as an issue for the rest of the year.
The company has taken a 4.7% price hike on some of the SKU (stock keeping unit) in January. This will help to mitigate whatever input costs inflation is visible at the moment. This price increase is not across the portfolio and, hence, overall price increase will be much lower.
On the company’s positioning in the instant noodles segment, the management said it was only looking to position itself in a niche segment and not be a mass player. Even in terms of availability, it will look to be present in selective outlets across the country.
Capital expenditure for CY13 is likely to be Rs2.5 billion, in line with previous guidance. The management did not commit to any special dividend considering the high cash balance on the books. As at the end of CY12, the company has Rs14.6 billion cash on the books.