GSK Consumer Healthcare- strong quarter − SELL :: Religare

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GSK Consumer Healthcare Ltd
A strong quarter but upside potential limited − SELL


During Q3CY10, GSK Consumer Healthcare’s (GSK Consumer) net
sales/EBITDA/Adj. PAT grew by 23.7%/23.1%/30/9%, beating our estimates of
20.6%/20.9%/23.2% for the quarter. Net sales increased 23.7% YoY to
Rs 6.1bn, largely led by strong volume growth in Horlicks and Boost. EBITDA
grew by 23.1% YoY to Rs 1.15bn with operating margins of 18.9% that
remained stable YoY. Higher prices of milk and milk powder were negated by
lower prices of malted barley and packaging materials. Adjusted PAT jumped
30.9% YoY to Rs 786mn due to the positive impact of higher other income. We
upgrade our earnings estimate for CY11 by 5.8% to reflect the price hikes taken
by the company. Rolling forward our valuations from Mar ’12 to Sep ’12
earnings, we have a revised Sep’ 11 target price of Rs 2,200 (from Rs 1,900
earlier). At the current valuations of 28x/22.7x CY11E/CY12E earnings, we see
limited upside in the stock. Maintain SELL.


Topline surges 23.7% YoY to Rs 6.1bn: During Q3CY10, GSK Consumer’s net
sales increased by 23.7% YoY to Rs 6.1bn, largely in line with our estimates. This
growth was led by a) 20% higher volumes b) a 5% price hike c) a 1% impact on
account of increase in excise duty. The company’s flagship MFD brands Horlicks
and Boost saw their overall volumes increase by 19%/20% and domestic
volumes by 17%/18%. Biscuit volumes too saw a strong 22% growth, albeit on a
low base. Exports jumped 70% on account of a low base effect (lower exports to
Sri Lanka in the corresponding period last year).

Margins remain stable: EBITDA grew by 23.1% YoY to Rs 1.15bn with operating
margins of 18.9% that remained stable YoY. The RM basket for the company
witnessed an inflation of 6.5% YoY for the quarter. However, gross profit margins
improved 50bps YoY on account of a 10% drop in malted barley prices and
benign packing material prices. The company’s A&P expenses increased by
130bps YoY to 17.6% (of sales) with absolute A&P expenses jumping 33% YoY
to Rs 1bn, largely on account of new product launches.

PAT beats estimates due to higher other income: GSK Consumer’s adjusted PAT
increased by 30.9% YoY to Rs 786mn, as PAT surged largely on account of
doubling of other income to Rs 130mn.

Maintain SELL: We upgrade our earnings estimate for CY11 by 5.8% and roll
forward our valuations from Mar ’12 earnings to Sep’ 12 earnings to get a revised
Sep ’11 target price of Rs 2,200. We believe that the current valuations, of
28x/22.7x CY11E/CY12E earnings, offer limited upside potential. Hence, we
maintain our SELL recommendation on the stock.