GSK Consumer – 3QCY2010 Result Update Angel Broking

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  GSK Consumer – 3QCY2010 Result Update

Angel Broking recommends a Neutral on GSK Consumer.

We have revised our estimates upwards to factor in the higher-thananticipated

top-line growth and other income. For CY2011 and CY2012, we

have revised upwards our top-line and earnings estimates by

3–5% and 7–8% respectively, to factor in sustained double-digit volume

growth in the core categories (Horlicks and Boost), increased revenue traction

from new launches and higher operating leverage. We recommend Neutral

view on the stock.

Impressive top-line; margins under pressure: GSK Consumer registered

robust top-line growth of 23.7% yoy to `613cr (`495cr) aided by 20% volume

and 5% value growth, while increase in excise duty (from 5 to 6%) led to ~1%

impact on top-line. On the operating front, the company registered margin

contraction of 35bp yoy on account of the 126bp yoy increase in

advertisement spend and 42bp yoy increase in other expenditure, despite

gross margin expansion of 48bp yoy and 85bp yoy decrease in staff cost.

Earnings registered a growth of 31% yoy aided by higher other income, 5%

yoy decline in depreciation, almost flat interest expense in absolute terms

(~`1cr) and significant revenue traction.

Outlook and Valuation: We continue to like GSK Consumer for sustained

volume growth in its core brands, higher contribution from new product

launches and potential higher dividend payout due to high the cash balance

(`900cr as on 3QCY2010). However, at `2,300, the stock is trading at fair

valuations of 22.2x CY2012E EPS of `103.6 leaving little room for upside or

negative surprises. Hence, we recommend Neutral view on the stock

Investment Rationale

􀂄 Core brands on strong footing, new launches hold potential: GSK Consumer

continues to post double-digit growth in its core brands Horlicks and Boost

driven by steady volume growth (management has indicated steady volume

growth of 12–13%) and ~5% from price hikes. Moreover, new launches

(Women’s Horlicks, Horlicks Nutribar, Actibase, Actigrow and Horlicks Foodles)

have started gaining traction and hold significant potential (contributed 5–6% to

top-line this quarter). In the noodles category, Horlicks Foodles, launched in the

North-West markets has received encouraging response and already gained

~1.5–1.75% market share, while sustaining the 4–5% market share in the

South-East markets.

􀂄 Margins to expand driving robust 20% earnings CAGR over CY2010-12E:

During CY2010-12, we expect GSK Consumer’s margins to expand to ~18%

(expect 16.5% in CY2010), despite lower gross margins, driven largely by higher

operating leverage and lower ad-spend (expected to be maintained at ~15–

16% of sales). Hence, we expect earnings to post robust 20% CAGR driven by

steady top-line growth (18% CAGR), higher other income (cash balance of over

`900cr as at the end of 3QCY2010) and margin expansion.

􀂄 Unjustified valuations of ~60% premium to Sensex: Over the last couple of

years, GSK Consumer has witnessed significant re-rating in valuations driven by

strong earnings growth, new variant launches under Horlicks and entry into new

product categories like noodles. However, the stock currently trades at ~60%

premium to the Sensex (in line with HUL), which we believe is unjustified given:

1) still ~90%+ revenues depend on single category malted foods, 2) lower

return ratios at ~30%, and 3) lower dividend payout at ~40%.

Outlook and Valuation

Post the 3QCY2010 result we have revised our estimates upwards to factor in the

higher-than-anticipated top-line growth and higher other income. Our top-line

estimates for CY2011 and CY2012 have been revised upwards by 3–5% owing to

the sustained double-digit volume growth in core brands and increased revenue

traction in its new launches. Earnings estimates are revised upwards by 7–8% to

factor in higher top-line growth and operating leverage. OPM has been revised

upwards by ~90-110bp to account for higher operating leverage and significant

revenue traction; however, gross margins are likely to be under pressure.