GSK Consumer’s margins improve despite rising input costs

GSK Consumer’s margins improve despite rising input costs

The current operating environment should ordinarily be a concern for food firm GlaxoSmithKline Consumer Healthcare Ltd (GSKCH), as the rising cost of farm inputs is affecting costs, while rising food inflation eats into the consumer’s shopping basket.

GSKCH’s December quarter results disclose some strain on the cost front, but sales growth appears unaffected.

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The company, which sells malt drink brands such as Horlicks and Boost, has extended the Horlicks brand to products such as nutritional bars and biscuits. Its instant noodles’ brand, too, appears to have done well, though the number of relatively new and large competitors in this space should be a concern. ITC Ltd is the latest to jump on to the noodles bandwagon.

In the December quarter, GSKCH’s sales rose by 21% to 524 crore over the year-ago period, but material costs rose at a much higher rate of 29%. Some of its key inputs include malt, milk and milk powder, and wheat. Though wheat prices have steadied during 2010, after a volatile year in 2009, milk prices have risen sharply again in 2010, catching food firms by surprise.

Consumer companies have shown a mature response to inflation, compared with earlier years, and are not passing on all cost hikes to the customer. Protecting volume growth and market share have taken precedence over everything else, including margins, due to rising competition.

GSKCH’s net profit grew by 58% despite higher material costs, thanks to advertising and promotion costs rising by 5% and other expenditure rising by only 9%. Together, they account for about 40% of sales.

As a result, operating profit margin rose by two percentage points over the year-ago period, though it was down by about four percentage points on a sequential basis. Higher other income contributed to net profit growth.

There are no signs of food inflation affecting demand for the company’s goods. One concern is that margins have been squeezed on a sequential basis and if advertising and promotion costs rise in future quarters, it may lose that buffer.

Rising input costs should be the only major concern to watch out for in 2011.

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