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GlaxoSmithKline Consumer
Healthcare Limited Overweight
GLSM.BO, SKB IN
Q2CY11: Strong revenue growth; margins disappoint
Revenue growth surprises; margins lower than expected. GSK
Consumer reported Net Sales, EBITDA and PAT growth of 22%, 10%
and 15% respectively for Q2CY11. While sales growth surprised on the
upside, margin contraction was higher than expected leading to lower
than estimated EBITDA growth during the qtr. Higher other income and
lower tax rate supported net earnings growth of 15%.
Healthy sales growth of 22% y/y during the quarter is likely to be
supported by mid teens volume growth in our view. This revenue growth
trend is encouraging in light of disappointing volume growth of ~7% in
the prior quarter.
RM inflation and high A&P weighs on margins. Gross margin
contraction of 300bp y/y was higher than expected. This could be on
account of higher milk, malt barley and packaging costs y/y in our view.
Further advertising and promotion spends rose 34% y/y aided by
investments behind recent launches. However moderate growth in other
expenses offset some of the impact and EBITDA margins declined
160bp y/y during the qtr. A&P/Sales at 15.3% during the qtr were up
140bp y/y and 70bp q/q. We believe A&P/Sales ratio should moderate
y/y during 2HCY11 as base becomes challenging (17.6% in 2HCY10).
Other operational income grew 35% y/y supported by higher business
auxillary income.
Valuation and Risk. We base our target price on PEG of 1.5x which is
in line with average PEG ratio for Indian consumer staple companies.
Our Dec-11 price target is Rs2580, implying CY11E and CY12E P/E of
29x and 25x respectively. Key risks to our recommendation and price
target are: (1) slowdown in consumption; (2) significant raw material
inflation; (3) aggressive competition; and (4) the entry of new players in
the malted food drink space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GlaxoSmithKline Consumer
Healthcare Limited Overweight
GLSM.BO, SKB IN
Q2CY11: Strong revenue growth; margins disappoint
Revenue growth surprises; margins lower than expected. GSK
Consumer reported Net Sales, EBITDA and PAT growth of 22%, 10%
and 15% respectively for Q2CY11. While sales growth surprised on the
upside, margin contraction was higher than expected leading to lower
than estimated EBITDA growth during the qtr. Higher other income and
lower tax rate supported net earnings growth of 15%.
Healthy sales growth of 22% y/y during the quarter is likely to be
supported by mid teens volume growth in our view. This revenue growth
trend is encouraging in light of disappointing volume growth of ~7% in
the prior quarter.
RM inflation and high A&P weighs on margins. Gross margin
contraction of 300bp y/y was higher than expected. This could be on
account of higher milk, malt barley and packaging costs y/y in our view.
Further advertising and promotion spends rose 34% y/y aided by
investments behind recent launches. However moderate growth in other
expenses offset some of the impact and EBITDA margins declined
160bp y/y during the qtr. A&P/Sales at 15.3% during the qtr were up
140bp y/y and 70bp q/q. We believe A&P/Sales ratio should moderate
y/y during 2HCY11 as base becomes challenging (17.6% in 2HCY10).
Other operational income grew 35% y/y supported by higher business
auxillary income.
Valuation and Risk. We base our target price on PEG of 1.5x which is
in line with average PEG ratio for Indian consumer staple companies.
Our Dec-11 price target is Rs2580, implying CY11E and CY12E P/E of
29x and 25x respectively. Key risks to our recommendation and price
target are: (1) slowdown in consumption; (2) significant raw material
inflation; (3) aggressive competition; and (4) the entry of new players in
the malted food drink space.
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