CMP Rs4,159, Target Rs4,627, Upside 11.2%

• GSK Consumer recorded ~15% yoy growth in revenues – in line with our expectations at Rs10.8bn during Q5 FY14 driven by a healthy ~13% yoy growth in HFD portfolio
• Horlicks grew by 14% yoy driven by strong performance of Chocolate and Women variants while Boost grew by 10% yoy driven by 7% underlying volume growth
• Net profit increased by ~10% yoy to Rs1.7bn - in line with our expectations. Recommend Buy rating on the stock, with a 9-month target price of Rs4,627

Result table

(Rs m)	Q5 FY14*	Q1 CY14	% yoy	Q4 CY13	% qoq
Net sales	10,791	9,399	14.8	8,391	28.6
Other operating  revenues	407	355	14.7	299	36.3
Total income	11,198	9,754	14.8	8,690	28.9
Material cost	(4,178)	(3,559)	17.4	(3,067)	36.2
Personnel cost	(1,003)	(890)	12.8	(827)	21.3
Advertising cost	(1,858)	(1,593)	16.6	(1,648)	12.7
Other overheads	(1,859)	(1,649)	12.7	(2,264)	(17.9)
Operating profit	2,300	2,063	11.5	884	160.2
OPM (%)	21.3	22.0	(63) bps	10.5	1,078 bps
Depreciation	(169)	(107)	57.7	(112)	50.6
Interest	(2)	(1)	21.4	(4)	(61.4)
Other income	480	324	48.0	446	7.7
PBT	2,610	2,279	14.5	1,213	115.1
Tax	(893)	(715)	24.9	(416)	114.8
Effective tax rate (%)	34.2	31.4	-	34.3	-
Reported PAT	1,717	1,564	9.8	797	115.3
PAT margin (%)	15.9	16.6	(73) bps	9.5	641 bps
Ann. EPS (Rs)	163.3	148.7	9.8	75.8	115.3

Source: Company, India Infoline Research * Year-end changed from December to March

Q5 revenues in line with expectations
GSK Consumer matched our revenue expectations by recording 14.8% yoy growth during Q5 FY14 at Rs10.8bn driven by healthy 13% yoy growth in the HFD portfolio and 32% yoy growth in foods segment. Domestic business reported 7% underlying volume growth (11% in Q4 FY14). Export growth remained healthy at 13% yoy. Other operating revenues increased by mere 14.7% yoy to Rs407mn due to supply chain disruptions and halving of Crocin (contributes ~12-15% to auxiliary income) price due to regulatory issues.

Strong growth across key brands
HFD portfolio reported 13% yoy growth driven by strong growth in its key brands Horlicks and Boost. Horlicks grew by 14% yoy driven by strong performance of Chocolate and Women variants. The Horlicks brand grew by 7% yoy in volume terms led by double digit growth in Chocolate Horlicks and 40% yoy in Women Horlicks. Boost grew by 10% yoy driven by 7% underlying volume growth. North and West India recorded 18% yoy revenue growth while South and East India recorded 13% yoy growth. The management expects its HFD portfolio to witness 6-9% yoy volume growth in FY15.

The management stated that the premium HFD portfolio is witnessing a strong growth (1.6x base variant). Overall Horlicks brand market share has increased by 60bps. Sachets recorded 15% yoy growth and constituted 5.5% of HFD sales. Packaged foods segment recorded healthy 32% yoy revenue growth during the quarter. The biscuits segment registered 18% yoy growth while gross margins expanded 200bps due to scale benefits and cost control measures. With the expansion of its product range in Oats segment, GSK now ranks second in Oats category and enjoys ~17% market share in southern markets. Oats grew by 100%+ yoy though on a low base. Foodles recorded 20% yoy growth during the quarter. The company has entered in Osteo calcium segment and is expecting revenues of Rs650-700mn in FY15.

Higher raw material and advertising cost impact OPM
Operating margins declined by 60bps to 21.3% due to sharp 80bps increase in raw material cost (sharp rise in milk & milk powder prices) and 30bps increase in adspend. A 30bps/20bps decline in overhead/staff cost restricted further margin erosion. The company has taken 3.5% price hike in HFD portfolio beginning Jan’14 to mitigate the impact of higher input prices. The management guided that adspend in FY15 would remain in the range of 15-17% of net sales.

Cost Analysis

As a % of net sales	Q5 FY14*	Q1 CY14	bps yoy	Q4 CY13	bps qoq
Material cost	38.7	37.9	85	36.6	217
Personnel cost	9.3	9.5	(17)	9.9	(56)
Advertising cost	17.2	16.9	27	19.6	(242)
Other overheads	17.2	17.5	(32)	27.0	(975)
Total costs	82.5	81.8	63	93.0	(1,057)

Source: Company, India Infoline Research * Year-end changed from December to March

Net profit matches expectations records 10% yoy increase
Net profit increased by ~10% yoy to Rs1.7bn - in line with our expectations. The growth could have been even better but for slower growth in business auxiliary income and higher tax outgo. Business auxiliary income (includes business income and cross-charge received on account of OTC products sold on behalf of GlaxoSmithKline Pharmaceuticals Ltd) grew by 14.7% yoy to Rs407mn (Q4 FY14 – Rs299mn). The management has guided business auxiliary income to grow at 20% on steady state basis. Non-operating income increased by 48% yoy to Rs480mn

Capex plans
The management plans to go for Greenfield capacity expansion as currently all its plants are running at full capacity levels. The company is holding high amount of cash on its books (Rs18bn) as it plans to carry out such Greenfield expansion every three years. The company expects to incur Rs7-8bn as capex every 2-3 years to increase capacity.

Maintain Market Performer
With zero debt on its books and operating cash flows of ~Rs3-7bn 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. The company has managed to increase market share of its core brand Horlicks by 60bps despite increased competition from Complan brand. The management has guided ~15% p.a. sustainable growth for the malted food category driven by 7-8% volume and 6-7% value growth. We expect GSK to register revenue/earnings CAGR of 16.3%/18.6% over CY12-FY16. At the current market price of Rs4,159, the stock is trading at 24x FY16E EPS of Rs173.4. We recommend Buy rating on the stock, with a 9-month target price of Rs4,627.

Financial Summary

Y/e 31 Dec (Rs m)	CY12	FY14E*	FY15E	FY16E
Revenues	30,794	46,829	41,782	48,416
yoy growth (%)	14.7	52.1	(10.8)	15.9
Operating profit	5,734	8,728	7,635	8,953
OPM (%)	18.6	18.6	18.3	18.5
Pre-exceptional PAT	4,368	6,748	6,129	7,293
Reported PAT	4,368	6,748	6,129	7,293
yoy growth (%)	23.0	54.5	(9.2)	19.0
EPS (Rs)	103.9	160.4	145.7	173.4
P/E (x)	40.1	25.9	28.5	24.0
Price/Book (x)	12.9	9.7	8.0	6.6
EV/EBITDA (x)	28.0	17.9	20.1	16.8
Debt/Equity (x)	0.0	0.0	0.0	0.0
RoE (%)	34.9	42.5	30.7	30.2
RoCE (%)	52.0	64.1	46.2	45.5

Source: Company, India Infoline Research
* Year-end changed from December to March