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GlaxoSmithKline Consumer Healthcare Limited Overweight
GLSM.BO, SKB IN
Riding the health and wellness wave; maintain OW
We maintain our positive stance on GSK Consumer, which reported strong
volume growth for the domestic business (~14%) in 2Q CY11. Management
commentary post earnings was quite encouraging as it expects MFD sales
growth to be sustained at 15-20% and margins to improve sequentially driven
by price increases and better mix. The company’s growth strategy based on
nutrition, widening distribution reach (increase direct reach from 0.65mn to
0.7mn outlets by CY11 end), and expanded product portfolio should help it to
maintain a 17% and 19% revenue and EPS CAGR, respectively, over CY10-
13. We maintain OW with a raised Jun-12 PT of Rs2,750.
Healthy domestic volume growth of 14% during 2Q CY11 supported by
16% and 11% volume growth for Horlicks and Boost brands respectively.
Price growth was 5% and 8% respectively for these brands. These rates are
encouraging after the poor performance in the prior quarter. Management
noted that market share across brands held up well. Value added premium
variants of Horlicks witnessed faster growth than core brands which grew by
14%. Faster growth for low-unit packs (+50% y/y) in rural areas during the
quarter also supported growth, with their share up now to ~2% of MFD sales.
Price increases to support margins in the coming quarters: Gross margin
decline of 300bp y/y during 2Q CY11 was higher than expected. This was
attributed to a steep increase in raw materials such as milk and milk solids
(+16% y/y) and malt (+16% y/y). Faster growth for biscuits (lower margin
profile than MFD) also weighed on gross margins. Management noted that it
expects RM inflation for CY11 to be 8-9% y/y. The company made a 2.3%
wtd. price rise in Jul-11 which should help control gross margin erosion in
the coming quarters. Further, we believe the A&P/Sales ratio will moderate
y/y during 2H CY11 as the base becomes challenging (17.6% in 2H CY10).
Non-MFD segment (6.2% of revenue): Mixed performance: While the
biscuit portfolio continues to witness strong growth (+49% y/y), the instant
noodle growth rates were subdued at 13% y/y during the quarter (market
share of 2.8% vs 3.5% in the prior quarter). Management said that while it has
scaled down its milk-based drinks and breakfast cereal bars business, its
recent entry into glucose segment had a good initial consumer response.
Earnings and PT revision: We marginally reduce our CY11/12 EPS
estimates by 2-3% as we build in lower gross margins. However, as we also
roll forward our price target timeframe to Jun-12, we raise our PT to Rs2,750.
This implies a CY12E and CY13E P/E of 27x and 23x respectively.
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
Riding the health and wellness wave; maintain OW
We maintain our positive stance on GSK Consumer, which reported strong
volume growth for the domestic business (~14%) in 2Q CY11. Management
commentary post earnings was quite encouraging as it expects MFD sales
growth to be sustained at 15-20% and margins to improve sequentially driven
by price increases and better mix. The company’s growth strategy based on
nutrition, widening distribution reach (increase direct reach from 0.65mn to
0.7mn outlets by CY11 end), and expanded product portfolio should help it to
maintain a 17% and 19% revenue and EPS CAGR, respectively, over CY10-
13. We maintain OW with a raised Jun-12 PT of Rs2,750.
Healthy domestic volume growth of 14% during 2Q CY11 supported by
16% and 11% volume growth for Horlicks and Boost brands respectively.
Price growth was 5% and 8% respectively for these brands. These rates are
encouraging after the poor performance in the prior quarter. Management
noted that market share across brands held up well. Value added premium
variants of Horlicks witnessed faster growth than core brands which grew by
14%. Faster growth for low-unit packs (+50% y/y) in rural areas during the
quarter also supported growth, with their share up now to ~2% of MFD sales.
Price increases to support margins in the coming quarters: Gross margin
decline of 300bp y/y during 2Q CY11 was higher than expected. This was
attributed to a steep increase in raw materials such as milk and milk solids
(+16% y/y) and malt (+16% y/y). Faster growth for biscuits (lower margin
profile than MFD) also weighed on gross margins. Management noted that it
expects RM inflation for CY11 to be 8-9% y/y. The company made a 2.3%
wtd. price rise in Jul-11 which should help control gross margin erosion in
the coming quarters. Further, we believe the A&P/Sales ratio will moderate
y/y during 2H CY11 as the base becomes challenging (17.6% in 2H CY10).
Non-MFD segment (6.2% of revenue): Mixed performance: While the
biscuit portfolio continues to witness strong growth (+49% y/y), the instant
noodle growth rates were subdued at 13% y/y during the quarter (market
share of 2.8% vs 3.5% in the prior quarter). Management said that while it has
scaled down its milk-based drinks and breakfast cereal bars business, its
recent entry into glucose segment had a good initial consumer response.
Earnings and PT revision: We marginally reduce our CY11/12 EPS
estimates by 2-3% as we build in lower gross margins. However, as we also
roll forward our price target timeframe to Jun-12, we raise our PT to Rs2,750.
This implies a CY12E and CY13E P/E of 27x and 23x respectively.
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