GlaxoSmithkline Consumer Healthcare (Q1 CY12)

India Infoline News Service | Mumbai |

After January 2012, CSD had stopped placing orders (due to fund constraints towards the end of FY12) resulting in a 30% yoy decline for GSK in the CSD channel for Q1 CY12. CSD contributes ~8% to the company’s revenues.

  • GSK Consumer recorded 14.5% yoy growth during Q1 CY12 at Rs8.1bn (marginally below our expectation of Rs8.3bn) driven by ~7% volume growth and 8% price hikes. Adjusting for the one-off decline in sales to army’s canteen stores division (CSD) revenue and volume growth was strong at 17.5% and 9.5% respectively
  • After January 2012, CSD had stopped placing orders (due to fund constraints towards the end of FY12) resulting in a 30% yoy decline for GSK in the CSD channel for Q1 CY12. CSD contributes ~8% to the company’s revenues. This had an adverse impact of 2.5% on the overall volume growth. Excluding CSD the volume growth was stable at 9.5% yoy. According to the management, the sales to CSD have been normalized in April. 
  • The key brand - Horlicks registered ~7% yoy price and 9.4% volume growth. Boost reported modest ~7% yoy growth (2.1% volume growth) on a high base last year. The management expects Boost volume growth to return back to average category volume growth level of ~8-10% in CY12. 
  • The biscuits portfolio recorded strong 31% yoy growth (~Rs400mn) during the quarter. While the oats segment saw a satisfactory ramp up. GSK Consumer plans to focus on biscuits and oats category whereas noodles, sports drinks and nutribar are currently on hold.
  • Operating margins for the quarter declined by 60bps to 19.9% (above our expectation of 19%) due to sharp 260bps increase in raw material cost. A 120bps/70bps decline in advertising and staff cost respectively restricted further margin erosion. Overall input cost inflation for the quarter was at ~9.5% yoy with skimmed milk powder and malted barley witnessing sharp witnessing sharp 20%/17% yoy increase in prices respectively. The company has taken ~8% price hike during the quarter to offset the input cost impact. 
  • GSK plans to maintain its adspend to sales ratio at ~15-16% level as it will further ramp up new products. We expect the company to mitigate the input cost and higher adspend pressure with price hikes and maintain/improve operating margins going forward.

 

Cost Analysis

As a % of net sales
Q1 CY12
Q1 CY11
bps yoy
Q4 CY11
bps qoq
Material cost
40.6
38.1
258
35.6
506
Personnel cost
8.1
8.8
(67)
10.2
(212)
Advertising cost
13.4
14.6
(116)
19.0
(554)
Other overheads
17.9
18.1
(17)
25.0
(705)
Total costs
80.1
79.5
58
89.8
(965)

Source: Company, India Infoline Research

 

Net profit for the quarter registered 19.3% yoy increase at Rs1.3bn – in line with our estimates partly fuelled by higher other income. Other income for the quarter (includes business income and cross-charge received on account of OTC products sold on behalf of GlaxoSmithKline Pharmaceuticals Ltd) was higher at Rs479mn against Rs340mn in Q1 CY11.

 

With zero debt on its books and operating cash flows of ~Rs3-4bn per annum, GSK is a cash-rich company. Low penetration levels in the core Malted Food Drinks category will provide surplus headroom for growth for GSK. GSK has increased its direct distribution reach to 700,000 outlets from 600,000 last year. Given the high volume growth visibility, the management plans to incur Rs2.5bn capex in CY12 and Rs1.5bn in CY13 in its new facility (first line likely to be operational from Q3 CY12 in Sonepat and the entire capacity should be completed by June 2013). We expect GSK to register earnings CAGR of 18.7% over CY11-13. The management’s confidence of sustaining volume growth and margins reaffirms our view. At the current market price of Rs2,620, the stock is trading at 21x CY13E EPS of Rs124.8. We maintain BUY, with a 9-month price target of Rs3,119 (earlier Rs2,912).

 

Results table

(Rs m)
Q1 CY12
Q1 CY11
% yoy
Q4 CY11
% qoq
Net sales
8,130
7,100
14.5
6,021
35.0
Material cost
(3,303)
(2,702)
22.3
(2,141)
54.3
Personnel cost
(661)
(624)
5.8
(617)
7.1
Advertising cost
(1,091)
(1,036)
5.4
(1,142)
(4.4)
Other overheads
(1,458)
(1,286)
13.4
(1,504)
(3.1)
Operating profit
1,617
1,453
11.3
616
162.3
OPM (%)
19.9
20.5
(58) bps
10.2
965 bps
Depreciation
(119)
(109)
9.1
(121)
(1.4)
Interest
(12)
(7)
78.8
(9)
34.1
Other income
479
340
40.8
487
(1.6)
PBT
1,964
1,677
17.1
973
101.8
Tax
(645)
(571)
12.9
(382)
68.7
Effective tax rate (%)
32.8
34.0
-
39.3
-
Reported PAT
1,320
1,106
19.3
591
123.3
PAT margin (%)
16.2
15.6
65 bps
9.8
642 bps
Ann. EPS (Rs)
125.5
105.2
19.3
56.2
123.3

Source: Company, India Infoline Research

 

Financial Summary

Y/e 31 Dec (Rs m)
CY10
CY11
CY12E
CY13E
Revenues
23,061
26,855
31,847
37,603
yoy growth (%)
20.0
16.5
18.6
18.1
Operating profit
3,767
4,250
5,087
6,210
OPM (%)
16.3
15.8
16.0
BSE 6,228.15 [32.55] ([0.52]%)
NSE 6,250.00 [29.70] ([0.47]%)

***Note: This is a NSE Chart

 

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