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Key takeaways from the concall
Glaxo Smithkline (GSK Consumer) posted CY10 volume growth of 14% in the MFD segment. Horlicks volumes grew
13% and Boost grew 18%.
The management indicated that it aimed to increase the contribution of the non-MFD segment to overall sales from
5% currently to 15% over the next three years, driven by biscuits and noodles.
EBITDA margins are likely to be sustained at current levels despite near term sales mix deterioration (increasing
share of lower margin biscuits and noodles) due to margin improvement in the MFD segment and lower ad-spends.
Foodles gained 3% all-India market share in its maiden year of launch (5% in East and South India). The management
aims at 15% market share over the next five years, led by the launch of variants and deeper distribution (currently
0.2m outlets).
Raw material inflation in CY10 was 6.5%, led by an increase in the prices of milk, (up ~16%), wheat (~3%) and sugar
(~6%). The management expects RM index inflation of 8.5% in CY11.
GSK Consumer announced a dividend of Rs50 for CY10 (including a special dividend of Rs25). However, the management
indicated the likelihood of higher dividend, if cash generation continued at a higher level.
Management confident of sustaining margins; upgrading estimates; maintain Buy: We reiterate our positive
stance on GSK Consumer as the management commentary instills confidence of sustained volume growth and margins.
We believe GSK Consumer has the pricing power in the MFD category and would increase prices again if needed (the
exit of Milo, the limited launch of Amaze and rollback of investments behind Chawyan Junior ensure strong pricing power
for GSK Consumer). We are upgrading estimates by 3-4% for CY11 and CY12 to factor in cost control and higher financial
other income. Our estimate is revised to Rs87.1 for CY11 (Rs84.3 earlier) and Rs104.8 for CY12 (Rs102.3 earlier). The
stock trades at 24.1x CY11E and 20.1x CY12E. Maintain Buy.
Key takeaways from the concall
GSK Consumer posted 14% CY10 volume growth in the MFD segment. Horlicks
volumes grew 13% and Boost grew 18%. The management indicated growth in the
MFD segment had entered a new orbit, led by higher penetration (currently ~20%)
and per-capita consumption (4x 500gm a year).
Horlicks' market share was 53% over January-November 2010 and Boost posted
15% market share (estimated market share gain of ~100bp).
The management indicated it aimed to increase the contribution of the non-MFD
segment to overall sales from 5% currently to 15% over the next three years, driven
by biscuits and noodles.
The biscuits segment grew 21% in CY10 (~70% in 4QCY10), led by launches in
value-added categories like creams and cookies. The management said it could
leverage the brand equity of Horlicks to offer differentiated products and report margins
higher than the industry.
GSK Consumer's EBITDA margins are likely to be sustained at current levels despite
near-term sales mix deterioration (increasing share of lower margin biscuits and noodles)
due to margin improvement in the MFD segment and lower ad-spend.
Foodles gained 3% all-India market share in its maiden year of launch (5% in East and
South India). The management aims at 15% market share over the next five years,
led by the launch of variants and deeper distribution (currently 0.2m outlets).
Raw material inflation in CY10 was 6.5%, led by an increase in the price of milk (up
~16%), wheat (~3%) and sugar (~6%). The management expects RM index inflation
of 8.5% in CY11.
Business auxiliary income grew 17% in CY10. The management expects growth of
18-20% over the coming years on the base portfolio. The addition of new products
from GSK Pharma could boost sales growth. Sensodyne toothpaste and Lucozade
drink will be rolled out nationally in CY11.
GSK Consumer announced dividend of Rs50 for CY10 (including special dividend of
Rs25). However, the management indicated that there was a likelihood of higher
dividend if cash generation continued at higher levels.
4QCY10 results above estimates
4QCY10 net sales grew 21.4% to Rs5.1b, driven largely by estimated volume growth of
10% and a price increase of 5% from 1 November 2010. Gross margins contracted 220bp
to 64.9% as prices of major inputs like milk and milk solids increased. A 290bp decline in
ad-spend and a 200bp lowering of other expenses enabled EBITDA margin expansion of
200bp to 11.5%. EBITDA grew 47.5% to Rs584m. Higher financial other income (up
~2.5x to Rs164m) led to 46% YoY PAT growth to Rs534m.
Strong volume growth (up 13%) boosts sales
A 13% volume growth in the malted food drinks (MFD) segment in 4QCY10 pushed up
net sales growth of ~21% YoY to Rs5.1b. Realization growth of ~8% was driven by price
increases in January 2010 and November 2010 and a mix improvement (faster growth in
value-added products).
In CY10, GSK Consumer posted volume growth of 14% in the domestic MFD segment.
Horlicks volumes grew 13% and Boost grew 18%. Export volumes were flat due to
continued pressure in Sri Lanka and the management indicated the likelihood of revival in
CY11. The management indicated growth in the MFD segment had entered a new orbit,
led by higher penetration (currently ~20%) and per capita consumption (4x 500gm a year).
Horlicks' market share was 53% over January-November 2010 and Boost posted 15%
market share (estimated market share gain of ~100bp).
Response to non-MFD launches in CY10 has been encouraging with biscuits growing
21% YoY and noodles cornering 3% market share in its maiden year of launch. Biscuit
growth was led by launches in value-added categories like creams and cookies. The
management said it could leverage the brand equity of Horlicks to offer differentiated
products and post margins higher than the industry. In noodles, the management indicated
that exit sales for Foodles was lower than its internal targets, led by supply chain constraints
and product acceptance. Foodles had 3% all India market share in its maiden year of
launch (5% in East and South India). The management aims at 15% market share over
the next five years, led by the launch of variants and deeper distribution (currently 0.2m
outlets).
Sustained input cost pressure expected; cost efficiency, scale benefits to
offset impact
4QCY10 gross margins contracted 220bp due to a sharp increase in prices of milk and
milk solids. The price increase was reflected for two months of 4QCY10. Input cost
pressure in 4QCY10 was offset by a 290bp decline in ad-spend and a 200bp lowering of
other expenses. EBITDA margins expanded 200bp to 11.5% and EBITDA grew 47.5%
to Rs584m. In CY10 gross margins contracted 30bp, led by input cost inflation of ~6.5%,
which the management largely passed on to the consumer. Milk prices were up 16%,
wheat was up 3% and sugar increased 6% in the year. Malted barley was benign (down
3%).
We expect input cost pressures to be sustained given the inflation in milk prices (another
round of price increase of ~5% is being taken in select regions). The management has
guided for input price inflation of 8.5% in CY11. GSK Consumer increased its prices in
November 2010, two months ahead of its annual price increase from January 2011. GSK
Consumer has the required pricing power in the MFD category and will increase prices
again, if needed.
Our concern over GSK Consumer's EBITDA margins due to an inherent mix deterioration
(increasing share of lower margin biscuits and noodles) has partly eased due to GSK
Consumer's multiple cushions in staff cost, ad-spends and overheads. The management
indicated margins were likely to be sustained at current levels due to margin improvement
in the MFD segment and lower ad-spend expected in coming years. We model a 180bp
margin contraction over CY11-13, more than offset by lower ad-spends, staff costs and
overheads.
Management confident of sustaining margins; upgrading estimates; maintain
Buy
We reiterate our positive stance on GSK Consumer as the management commentary
instills confidence of sustained volume growth and margins. We believe GSK Consumer
has the required pricing power in the MFD category and would increase prices again,
should the need arise (exit of Milo and limited launch of Amaze, and rollback of investments
behind Chawyan Junior ensures strong pricing power for GSK Consumer). We are
upgrading our estimates by 3-4% for CY11 and CY12 to factor in cost controls and higher
financial other income. Our estimate is revised to Rs87.1 for CY11 (Rs84.3 earlier) and
Rs104.8 for CY12 (Rs102.3 earlier). The stock trades at 24.1x CY11E and 20.1x CY12E.
Maintain Buy.
Company description
GSK Consumer is the largest player in the Rs18b Indian
health drink market, with a 70% market share. The category
entered a new growth orbit with growth rates sustaining
above 10%. Besides, the management aims to increase the
share of the non-MFD segment from 5% currently to 15%
over the next three years. Value-added variants of Horlicks
account for ~18% of brand sales.
Key investment arguments
Volume growth in the core MFD category is robust.
We model 12% volume growth over CY10-12.
GSK Consumer has strong pricing power in the MFD
segment as key players like Nestle, HUL and Dabur
have either exited or are dormant in the segment.
Key investment risks
Milk and milk products form more than 50% of the raw
material costs for the company and a steep increase in
milk prices would impact margins directly.
GSK Consumer has more than 70% market share in
the health food segment and entry of a major company
in the segment would be likely to result in erosion of
market share.
Recent developments
GSK Consumer raised prices by 5.5% from November
2010. Prices of value-added variants were similarly
increased in January 2011.
Foodles exited in November 2010 with all India market
share of 3% and 5% in the east and the south.
Valuation and view
We are upgrading our estimates by 3-4% for CY11
and CY12 and our estimates are revised to Rs87.1 for
CY11 (Rs84.3 earlier) and Rs104.8 (Rs102.3 earlier).
The stock trades at 24.1x CY11E and 20.1x CY12E.
Maintain Buy.
Sector view
We are cautious about volume growth in the sector given
competitive intensity and inflationary pressure.
Companies with low competitive pressure (like ITC and
GSK Consumer) will be better off.
The long-term prospects are bright given rising incomes
and low penetration.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key takeaways from the concall
Glaxo Smithkline (GSK Consumer) posted CY10 volume growth of 14% in the MFD segment. Horlicks volumes grew
13% and Boost grew 18%.
The management indicated that it aimed to increase the contribution of the non-MFD segment to overall sales from
5% currently to 15% over the next three years, driven by biscuits and noodles.
EBITDA margins are likely to be sustained at current levels despite near term sales mix deterioration (increasing
share of lower margin biscuits and noodles) due to margin improvement in the MFD segment and lower ad-spends.
Foodles gained 3% all-India market share in its maiden year of launch (5% in East and South India). The management
aims at 15% market share over the next five years, led by the launch of variants and deeper distribution (currently
0.2m outlets).
Raw material inflation in CY10 was 6.5%, led by an increase in the prices of milk, (up ~16%), wheat (~3%) and sugar
(~6%). The management expects RM index inflation of 8.5% in CY11.
GSK Consumer announced a dividend of Rs50 for CY10 (including a special dividend of Rs25). However, the management
indicated the likelihood of higher dividend, if cash generation continued at a higher level.
Management confident of sustaining margins; upgrading estimates; maintain Buy: We reiterate our positive
stance on GSK Consumer as the management commentary instills confidence of sustained volume growth and margins.
We believe GSK Consumer has the pricing power in the MFD category and would increase prices again if needed (the
exit of Milo, the limited launch of Amaze and rollback of investments behind Chawyan Junior ensure strong pricing power
for GSK Consumer). We are upgrading estimates by 3-4% for CY11 and CY12 to factor in cost control and higher financial
other income. Our estimate is revised to Rs87.1 for CY11 (Rs84.3 earlier) and Rs104.8 for CY12 (Rs102.3 earlier). The
stock trades at 24.1x CY11E and 20.1x CY12E. Maintain Buy.
Key takeaways from the concall
GSK Consumer posted 14% CY10 volume growth in the MFD segment. Horlicks
volumes grew 13% and Boost grew 18%. The management indicated growth in the
MFD segment had entered a new orbit, led by higher penetration (currently ~20%)
and per-capita consumption (4x 500gm a year).
Horlicks' market share was 53% over January-November 2010 and Boost posted
15% market share (estimated market share gain of ~100bp).
The management indicated it aimed to increase the contribution of the non-MFD
segment to overall sales from 5% currently to 15% over the next three years, driven
by biscuits and noodles.
The biscuits segment grew 21% in CY10 (~70% in 4QCY10), led by launches in
value-added categories like creams and cookies. The management said it could
leverage the brand equity of Horlicks to offer differentiated products and report margins
higher than the industry.
GSK Consumer's EBITDA margins are likely to be sustained at current levels despite
near-term sales mix deterioration (increasing share of lower margin biscuits and noodles)
due to margin improvement in the MFD segment and lower ad-spend.
Foodles gained 3% all-India market share in its maiden year of launch (5% in East and
South India). The management aims at 15% market share over the next five years,
led by the launch of variants and deeper distribution (currently 0.2m outlets).
Raw material inflation in CY10 was 6.5%, led by an increase in the price of milk (up
~16%), wheat (~3%) and sugar (~6%). The management expects RM index inflation
of 8.5% in CY11.
Business auxiliary income grew 17% in CY10. The management expects growth of
18-20% over the coming years on the base portfolio. The addition of new products
from GSK Pharma could boost sales growth. Sensodyne toothpaste and Lucozade
drink will be rolled out nationally in CY11.
GSK Consumer announced dividend of Rs50 for CY10 (including special dividend of
Rs25). However, the management indicated that there was a likelihood of higher
dividend if cash generation continued at higher levels.
4QCY10 results above estimates
4QCY10 net sales grew 21.4% to Rs5.1b, driven largely by estimated volume growth of
10% and a price increase of 5% from 1 November 2010. Gross margins contracted 220bp
to 64.9% as prices of major inputs like milk and milk solids increased. A 290bp decline in
ad-spend and a 200bp lowering of other expenses enabled EBITDA margin expansion of
200bp to 11.5%. EBITDA grew 47.5% to Rs584m. Higher financial other income (up
~2.5x to Rs164m) led to 46% YoY PAT growth to Rs534m.
Strong volume growth (up 13%) boosts sales
A 13% volume growth in the malted food drinks (MFD) segment in 4QCY10 pushed up
net sales growth of ~21% YoY to Rs5.1b. Realization growth of ~8% was driven by price
increases in January 2010 and November 2010 and a mix improvement (faster growth in
value-added products).
In CY10, GSK Consumer posted volume growth of 14% in the domestic MFD segment.
Horlicks volumes grew 13% and Boost grew 18%. Export volumes were flat due to
continued pressure in Sri Lanka and the management indicated the likelihood of revival in
CY11. The management indicated growth in the MFD segment had entered a new orbit,
led by higher penetration (currently ~20%) and per capita consumption (4x 500gm a year).
Horlicks' market share was 53% over January-November 2010 and Boost posted 15%
market share (estimated market share gain of ~100bp).
Response to non-MFD launches in CY10 has been encouraging with biscuits growing
21% YoY and noodles cornering 3% market share in its maiden year of launch. Biscuit
growth was led by launches in value-added categories like creams and cookies. The
management said it could leverage the brand equity of Horlicks to offer differentiated
products and post margins higher than the industry. In noodles, the management indicated
that exit sales for Foodles was lower than its internal targets, led by supply chain constraints
and product acceptance. Foodles had 3% all India market share in its maiden year of
launch (5% in East and South India). The management aims at 15% market share over
the next five years, led by the launch of variants and deeper distribution (currently 0.2m
outlets).
Sustained input cost pressure expected; cost efficiency, scale benefits to
offset impact
4QCY10 gross margins contracted 220bp due to a sharp increase in prices of milk and
milk solids. The price increase was reflected for two months of 4QCY10. Input cost
pressure in 4QCY10 was offset by a 290bp decline in ad-spend and a 200bp lowering of
other expenses. EBITDA margins expanded 200bp to 11.5% and EBITDA grew 47.5%
to Rs584m. In CY10 gross margins contracted 30bp, led by input cost inflation of ~6.5%,
which the management largely passed on to the consumer. Milk prices were up 16%,
wheat was up 3% and sugar increased 6% in the year. Malted barley was benign (down
3%).
We expect input cost pressures to be sustained given the inflation in milk prices (another
round of price increase of ~5% is being taken in select regions). The management has
guided for input price inflation of 8.5% in CY11. GSK Consumer increased its prices in
November 2010, two months ahead of its annual price increase from January 2011. GSK
Consumer has the required pricing power in the MFD category and will increase prices
again, if needed.
Our concern over GSK Consumer's EBITDA margins due to an inherent mix deterioration
(increasing share of lower margin biscuits and noodles) has partly eased due to GSK
Consumer's multiple cushions in staff cost, ad-spends and overheads. The management
indicated margins were likely to be sustained at current levels due to margin improvement
in the MFD segment and lower ad-spend expected in coming years. We model a 180bp
margin contraction over CY11-13, more than offset by lower ad-spends, staff costs and
overheads.
Management confident of sustaining margins; upgrading estimates; maintain
Buy
We reiterate our positive stance on GSK Consumer as the management commentary
instills confidence of sustained volume growth and margins. We believe GSK Consumer
has the required pricing power in the MFD category and would increase prices again,
should the need arise (exit of Milo and limited launch of Amaze, and rollback of investments
behind Chawyan Junior ensures strong pricing power for GSK Consumer). We are
upgrading our estimates by 3-4% for CY11 and CY12 to factor in cost controls and higher
financial other income. Our estimate is revised to Rs87.1 for CY11 (Rs84.3 earlier) and
Rs104.8 for CY12 (Rs102.3 earlier). The stock trades at 24.1x CY11E and 20.1x CY12E.
Maintain Buy.
Company description
GSK Consumer is the largest player in the Rs18b Indian
health drink market, with a 70% market share. The category
entered a new growth orbit with growth rates sustaining
above 10%. Besides, the management aims to increase the
share of the non-MFD segment from 5% currently to 15%
over the next three years. Value-added variants of Horlicks
account for ~18% of brand sales.
Key investment arguments
Volume growth in the core MFD category is robust.
We model 12% volume growth over CY10-12.
GSK Consumer has strong pricing power in the MFD
segment as key players like Nestle, HUL and Dabur
have either exited or are dormant in the segment.
Key investment risks
Milk and milk products form more than 50% of the raw
material costs for the company and a steep increase in
milk prices would impact margins directly.
GSK Consumer has more than 70% market share in
the health food segment and entry of a major company
in the segment would be likely to result in erosion of
market share.
Recent developments
GSK Consumer raised prices by 5.5% from November
2010. Prices of value-added variants were similarly
increased in January 2011.
Foodles exited in November 2010 with all India market
share of 3% and 5% in the east and the south.
Valuation and view
We are upgrading our estimates by 3-4% for CY11
and CY12 and our estimates are revised to Rs87.1 for
CY11 (Rs84.3 earlier) and Rs104.8 (Rs102.3 earlier).
The stock trades at 24.1x CY11E and 20.1x CY12E.
Maintain Buy.
Sector view
We are cautious about volume growth in the sector given
competitive intensity and inflationary pressure.
Companies with low competitive pressure (like ITC and
GSK Consumer) will be better off.
The long-term prospects are bright given rising incomes
and low penetration.
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