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We upgrade GSKCH to Outperform with a revised price
target of Rs2,643 (valuing it at forward P/E of 22x).
Volume growth in core business continues to be strong.
We expect it to improve from 8.5% in CY11E to 10.5%
in CY12/13E.
Margin expansion a possibility because of lower
adspend (pace of new launches have come down) and
softening in some of the agri-inputs.
The stock has been range bound in the past one year –
YTD underperformance of 10% over BSE FMCG Index,
offers a good entry point.
Upgrade to Outperform. We upgrade GSKCH given i)
volume growth in core business remains strong, ii) likely
margin improvement and iii) recent underperformance. At
one-year forward P/E of 22.7x, we find valuations
reasonable, especially when compared to P/E of 25.3x for
the FMCG sector. Pricing power and earnings sustainability
in inflationary environment will enable it to sustain premium
valuations. We roll forward to Sep ’13 EPS with a revised
price target of Rs2,643 (earlier Rs2,461).
Volume growth continues to be strong. Lower-thanexpected 6% volume growth in 1Q CY11 was an aberration
as volumes rebounded smartly in 2Q with 14-15% growth.
Our channel checks suggest that core volume growth
continues to remain strong even in 3Q CY11. Driven by
innovation, volume momentum has picked up in the past
few years (3-year volume CAGR at 13% compared to 7%
in past 10 years). Variant led innovations (like Horlicks
Gold) and wider positioning (new campaign positions it as
the best additive to milk) should help in driving sustained
double digit volume growth in the medium term.
High possibility for margin increase. Raise CY12/13
EPS by 2/3%. New product launches raised adspend-tosales from 11.8% in CY04 to 16.1% in CY10. With pace of
new launches coming down, we expect adspend-to-sales
to reduce. With lower MSP increases in wheat, price
softening in sugar and barley we also expect raw material
cost-to-sales to come down from its 10-year high of ~38%.
Any softening in milk can lead to significant margin
improvement. We expect OPM to improve from 18.4% in
CY10 to 20.1% by CY13E leading to an EPS CAGR of
20.8% over CY10-13E.
Near-term triggers & key risks. Lower adspend can lead
to 25-30% PAT growth in the next couple of quarters and
act as a positive trigger. Failure in new launches may affect
investor sentiment negatively
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We upgrade GSKCH to Outperform with a revised price
target of Rs2,643 (valuing it at forward P/E of 22x).
Volume growth in core business continues to be strong.
We expect it to improve from 8.5% in CY11E to 10.5%
in CY12/13E.
Margin expansion a possibility because of lower
adspend (pace of new launches have come down) and
softening in some of the agri-inputs.
The stock has been range bound in the past one year –
YTD underperformance of 10% over BSE FMCG Index,
offers a good entry point.
Upgrade to Outperform. We upgrade GSKCH given i)
volume growth in core business remains strong, ii) likely
margin improvement and iii) recent underperformance. At
one-year forward P/E of 22.7x, we find valuations
reasonable, especially when compared to P/E of 25.3x for
the FMCG sector. Pricing power and earnings sustainability
in inflationary environment will enable it to sustain premium
valuations. We roll forward to Sep ’13 EPS with a revised
price target of Rs2,643 (earlier Rs2,461).
Volume growth continues to be strong. Lower-thanexpected 6% volume growth in 1Q CY11 was an aberration
as volumes rebounded smartly in 2Q with 14-15% growth.
Our channel checks suggest that core volume growth
continues to remain strong even in 3Q CY11. Driven by
innovation, volume momentum has picked up in the past
few years (3-year volume CAGR at 13% compared to 7%
in past 10 years). Variant led innovations (like Horlicks
Gold) and wider positioning (new campaign positions it as
the best additive to milk) should help in driving sustained
double digit volume growth in the medium term.
High possibility for margin increase. Raise CY12/13
EPS by 2/3%. New product launches raised adspend-tosales from 11.8% in CY04 to 16.1% in CY10. With pace of
new launches coming down, we expect adspend-to-sales
to reduce. With lower MSP increases in wheat, price
softening in sugar and barley we also expect raw material
cost-to-sales to come down from its 10-year high of ~38%.
Any softening in milk can lead to significant margin
improvement. We expect OPM to improve from 18.4% in
CY10 to 20.1% by CY13E leading to an EPS CAGR of
20.8% over CY10-13E.
Near-term triggers & key risks. Lower adspend can lead
to 25-30% PAT growth in the next couple of quarters and
act as a positive trigger. Failure in new launches may affect
investor sentiment negatively
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