CMP Rs3,079, Target Rs3,439, Upside 11.7%
- GSK Consumer matched our expectations by recording strong 14.9% yoy growth during Q3 CY12 at Rs8.3bn. GSK witnessed muted volume growth at 6% primarily due to lower army’s canteen stores division (CSD) sales and mere 3% yoy increase in exports (contributing ~5% to revenues).
- Domestic sales grew by 16% yoy to Rs7.8bn (despite flat CSD sales) driven by 6% volume growth and 10% price hikes. Adjusting for the CSD sales, revenue growth was strong at ~18%. The key brand - Horlicks registered 16% yoy growth – 4.5% volume growth (ex-CSD 6%). Boost reported an impressive ~22% yoy growth (8.5% volume growth) on.
- The biscuits portfolio recorded strong 29% yoy growth (~Rs415mn, volume growth ~23%) during the quarter. While the oats segment saw a satisfactory ramp up. Horlicks Oats maintained its No 3 position in South India with ~11% market share (marginally down from 11.3% in Q2 CY12). Foodles revenues declined to Rs60mn during the quarter (GSK has shifted focus to niche multi-grain offering which earns higher gross margins, but not competing in the mass noodles segment).
- Operating margins expanded by 60bps to 17% aided by lower raw material and overhead cost. Higher adspend and staff cost restricted further margin erosion. Overall input cost inflation for the quarter was at ~8% yoy with sugar, wheat flour, skimmed milk powder and malted barley witnessing 20%/13%/7%/6% yoy increase in prices respectively. The company has taken ~10% price hike during the quarter to offset the input cost impact.
- GSK plans to maintain its adspend to sales ratio at ~15-17% 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.
As a % of net sales Q3 CY12 Q3 CY11 bps yoy Q2 CY12 bps qoq Material cost 37.5 37.9 (39) 37.0 47 Personnel cost 9.4 9.2 16 10.8 (147) Advertising cost 16.7 16.6 13 15.9 84 Other overheads 19.4 19.9 (50) 21.0 (164) Total costs 83.0 83.6 (59) 84.8 (181)
Net profit for the quarter, matched our expectations by recording 24.8% yoy increase at Rs1.3bn, partly led by higher other income and lower depreciation. Other income for the quarter was higher at Rs578mn against Rs476mn in Q3 CY11 (includes business income and cross-charge received on account of OTC products sold on behalf of GlaxoSmithKline Pharmaceuticals Ltd – Rs280mn against Rs220mn in Q3 CY11 – strong growth in Sensodyne and Eno).
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 planned a capex of Rs1.2bn for CY12E out of which Rs600mn has been already incurred (Rs2.7bn for CY13). The new plant in Sonepat will go on stream in H1 CY13, producing 18,000 tons, sufficing its demand for ~1.5 years. GSK has increased its direct distribution reach to 750,000 outlets and is also increasing focus on rural market, currently contributing ~26-27% to its total sales, with specialized combo packs and increased distribution. We expect GSK to register earnings CAGR of 19.5% over CY11-13. The management’s confidence of sustaining volume growth and margins reaffirms our view. At the current market price of Rs3,079, the stock is trading at 25.5x CY13E EPS of Rs120.7. We maintain BUY, with a revised 9-month price target of Rs3,439.
(Rs m) Q3 CY12 Q3 CY11 % yoy Q2 CY12 % qoq Net sales 8,275 7,201 14.9 7,297 13.4 Material cost (3,104) (2,729) 13.8 (2,703) 14.8 Personnel cost (775) (663) 17.0 (791) (2.0) Advertising cost (1,386) (1,196) 15.9 (1,161) 19.4 Other overheads (1,605) (1,433) 12.0 (1,536) 4.5 Operating profit 1,405 1,180 19.1 1,107 26.9 OPM (%) 17.0 16.4 59 bps 15.2 181 bps Depreciation (77) (117) (33.9) (86) (9.9) Interest (3) (10) (73.8) (8) (67.5) Other income 578 476 21.3 572 0.9 PBT 1,903 1,530 24.4 1,585 20.0 Tax (617) (499) 23.6 (519) 18.9 Effective tax rate (%) 32.4 32.6 - 32.8 - Reported PAT 1,286 1,030 24.8 1,066 20.6 PAT margin (%) 15.5 14.3 123 bps 14.6 93 bps Ann. EPS (Rs) 122.3 98.0 24.8 101.4 20.6
Y/e 31 Dec (Rs m) CY10 CY11BSE 6,327.10 61.20 (0.98%)NSE 6,366.45 82.30 (1.31%)
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Tags GlaxoSmithkline Consumer Healthcare (Q3 CY12)
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