GSK Consumer Healthcare Sees Decline In Operating Margins In Dec 2012 Quarter

GlaxoSmithKline Consumer Healthcare reported a decent set of Q4FY12 numbers. (The company follows it book closure as the calendar year, and not the fiscal year.) The result came in post market hours on February 15, 2013. However, there were already speculations that there would be no positives from the announcement, and this resulted in the stock closing almost 2% lower at Rs 3766 per share.

For the December quarter of 2012, the company’s Income from Operations grew by 18.58% to Rs 734 crore and the Net Profit grew by 18% to Rs 69.65 crore on a YoY basis. The Net Profit of the company was supported by a moderate rise in Other Income and a substantial decline in the tax outgo. The Other Operating Income also saw a robust growth of 47% to Rs 25.44 crore, helping the company to post a decent topline.

On an average, the company paid tax at 32.68% for the December 2012 quarter. This was much lower than 39.26%, which was paid on Profit before Tax in the similar period last year.

On the expense side, the purchase of goods increased by 42% to Rs 44 crore, while the Employee Expense grew by 27% to Rs 78 crore YoY. This dragged the overall operating performance of the company. Its Operating Profit declined by 3% to Rs 76 crore, while the Operating Margin decreased substantially by 234 basis points to 10.40% YoY. Advertisement expense increased by 16% to Rs 133 crore but the Advertisement-to-Sales ratio decreased by 37 basis points to 18.06% on a YoY basis.

Overall, the company faced trouble in maintaining its EBITDA margins, to which the street reacted negatively. On the valuations front, the company is trading at PE multiple of 33.50x its full year (FY12) EPS of Rs 112.42. 

We believe that the declining margins would not help the company to command such valuations, and hence, we expect a downside risk on the counter.