GlaxoSmithKline Consumer’s growth dents cash flow in 2010

GlaxoSmithKline Consumer’s growth dents cash flow in 2010

GlaxoSmithKline Consumer Healthcare Ltd’s (GSKCH) annual report shows that cash generated from operations in 2010 dipped 10%. The fall is despite GSKCH reporting a good performance, with operating profit (before working capital changes) rising about 20%.

The company’s cash flow dipped because of higher working capital requirements. In 2010, debtors and inventories both increased, compared with a decline in 2009. While creditors and provisions did increase, it was not enough. While lower cash from operations is usually a matter of concern, it could be overlooked because the company is in a strong growth phase, and the quantum is not very significant. Rising input costs, too, could be responsible for higher inventories.

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GSKCH has been diversifying its product portfolio. In 2010, sales of Horlicks rose 19%, better than the previous year’s 18%, while Boost’s sales have risen 24%, after growing 16% in 2009. It has extended the brand into biscuits and launched variants. Its instant noodles brand Foodles appears to be doing well, with about 32 crore in sales, about 1% of the total. This is a new brand that went national only in the second half of 2010. Also launched last year was sports drink Lucozade, which could further add to growth if successful. Snacks—noodles, nutrition bars and biscuits—now contribute about 6% to sales, compared with about 4% in 2009.

The company’s sales growth does not appear under threat, as it is investing behind its brands, and keeping price increases at modest levels. It is investing about 220 crore to add to capacity, which will be commissioned in 2012. Till then, existing capacities and outsourced production should be enough to cater to demand.

GSKCH’s overall raw material costs rose 19%, but its break-up shows that the main inputs—malt and milk—were not the chief culprits. Malt’s per unit cost fell 9%, liquid milk was up by 21% and milk powder by 11%. These inputs have been showing stable trends in 2011 so far.

Other inputs, which could be attributable to its newer products, have risen by 46%. A more benign raw material scenario, at least for major inputs, is a good sign for GSKCH. If sustained, this will deliver better profitability, as the company is also growing in scale.

Graphic by Yogesh Kumar/Mint

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