Picture perfect • GSK consumer:: IIFL

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Picture perfect
• GSK consumer’s 3QCY10 earnings grew 31% YoY which was
significantly ahead of our estimate of 20% YoY growth
• Revenue growth was very strong at 24% YoY which was
largely volume led, with price growth of 5%-6%
• EBITDA margin was largely maintained YoY despite historic
high ad spends and steep raw material cost inflation
• Gross margins expanded despite the raw material cost
inflation as the price hikes covered for upto 15% inflation
• Other income saw a 119% YoY jump due to higher cash on
books and yield on investments
• We increase our CY10-12 estimates by 2-4% to factor in
higher revenue growth and gross margins. We increase our
target price to Rs2,500. We maintain BUY.
• We continue to believe that GSK would see sustained 20%+
earnings growth over CY10-12. We see possibility of earnings
upgrades for CY12 as ad spends which are currently at peak
levels could tend lower.


EBITDA margins sustain despite peak ad spends and high raw
material inflation: GSK faced steep inflation in milk, malt and
packaging costs which were entirely passed on to consumers through a
5% price hike taken in January. As raw materials form only c37% of net
sales for GSK, a 5% price hike is sufficient to pass on upto 15% raw
material inflation. As a result gross margins expanded YoY. Ad spends
were at a historic high at 17.5% of sales, while employee costs came off
YoY as a % of sales due to the high revenue growth.

Revenue growth very strong driven by volumes: Revenue growth
was 24% YoY which was partly helped by a weak base quarter which had
seen a 50% YoY decline in exports due to a high import tax levied in Sri
Lanka which took away c4% of total sales. Even adjusting for this growth
was very strong and volume led. GSK has taken YoY price hikes of c5%,
which means that volume growth was very strong at 18-19% YoY.


We upgrade earnings, maintain BUY, possibility of further
earnings upgrades remains
We upgrade CY10-12 earnings estimates by 2-4% to factor in higher
revenue growth and better gross margins. We revise our 1-year target
price to Rs2,500 and maintain BUY. Though the stock has outperformed
over the past year, we believe there could be further earnings upgrades
in the stock. Advertising spends which are at 15-16% of net sales in
CY10 as compared to the historic range of 12-13% could come off in
CY12 as the new launches start ramping up substantially.


We expect GSK to deliver 23% earnings CAGR over CY10-12
GSK’s core malted beverage category has seen a reduction in
competitive intensity over the past few years. The company is well
positioned to exploit the strong brand equity of its flagship brand
Horlicks in new segments like noodles and biscuits, while continuing to
benefit from the expansion of its core category. We expect GSK to
deliver 18% revenue CAGR over CY10-12. The margin resilience of GSK
over CY09 and CY10 in the face of high raw material inflation and
increased ad spends demonstrates the dominant market position of the
company in its core category. We expect EBITDA margins to marginally
improve over CY10-12 as ad spends tend lower and gross margins
improve on lower raw material cost inflation. We forecast 23% earnings
CAGR over CY10-12.