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GlaxoSmithkline Consumer (SKB)
Consumer products
Good show, GSK remains a preferred pick. 3QCY11 was further demonstration of
underlying strong growth trend in malted food drink category—Horlicks volumes
+10%, sales +18%, EBITDA +24%, PAT +31%. Modest price hikes and mix
improvement aided gross margin management (decline of just 70 bps), in our view.
‘Horlicks Gold’, launched a few months back, already forms 3% of Horlicks sales. We
reiterate that the varianting-led growth in MFD category could create value growth
tailwinds as well as mix-improvement-led margin expansion opportunity for GSK. ADD.
Strong brand + good innovations + smart activation = all-round good show
GSK Consumer reported sales of Rs7,201 mn (+18%, KIE est. Rs7,214 mn), EBITDA of Rs1,180 mn
(+24%, KIE est. Rs1,092 mn) and PAT of Rs1,030 mn (+31%, KIE est. Rs909 mn).
Sales growth of 18% was driven by 8% volume growth in the malted food drink (MFD)
category (base quarter had ~19% volume growth) with Horlicks growing by 10% in volumes
and Boost at 5%. The quarter had the benefit of 5% price increase in November 2010 and 3%
in July 2011.
Gross margin management pleasantly surprised us (just 70 bps decline) considering the
significant inflation in most of GSK’s inputs – in 1HFY12; barley prices were up +18% and milk
prices were up +20%. However, sugar price declined 19%. EBITDA margin expanded 87 bps to
16.4% primarily on the back of savings in adspends (97 bps) and benefits of operating leverage
(marginal savings in staff cost (31 bps) and other expenditure (29 bps)). Higher other income of
Rs476 mn is due to higher treasury yields and higher other operating income for distributing
products of GSK Asia (good sales of Sensodyne, Eno and Crocin).
Our optimism continues to be on opportunities in core MFD; limited excitement on new products
As highlighted in our note dated September 9, 2011, ’Proposition-based products – the next
growth driver’, the variants-led growth in malted food drink (MFD) category could create value
growth tailwinds as well as mix improvement-led margin expansion opportunity for GSK. Apart
from the continued success of Junior Horlicks, Mothers Horlicks and Women’s Horlicks in 2QFY12,
GSK had launched ‘Horlicks Gold’ at a 28% premium to core. Horlicks Gold now forms 3% of
Horlicks sales. We continue to believe that “While it is still early days in the lifecycle of these
products, we believe that good performance of these products is a significant positive, as it
demonstrates ability of the company to create demand and increase consumption points.”
While GSK has launched multiple new products such as Actibase, Actigrow, Horlicks Chill
Dood, Nutribar, cream biscuits, Foodles, Boost glucose powder etc., our optimism has
always been on the potential of the malted food drink category (MFD). Most of its new
launches (other than in MFD) are likely witnessing signs of fatigue, in our view.
Biscuits are the only exception and it registered a growth of 18% during the quarter. Foods
portfolio (noodles and biscuits) now comprises ~6% of the company’s sales. Foodles sales
growth was flat during the quarter due to supply chain issues (likely with Indo Nissin). The
company has recently launched oats in South India.
Takeaways from analyst concall
Boost had a marginally disappointing quarter with 5% volume growth. While GSK’s Boost
and Cadbury’s Bournvita have ~15% market share each; Boost has a dominant presence
in South and Bournvita in West. While Boost benefited due to its relaunch in CY2010, the
recently relaunched Bournvita has likely outperformed Boost in 3QCY11, in our view.
Low unit packs (LUP) form 3.5% of sales. The company is primarily marketing these packs
in north and west where its presence is relatively weaker than south and west. While
margins in these packs are lower than bigger packs the company is pushing these
products to aid consumer recruitment though it has not yet seen signs of consumers
uptrading to bigger packs from LUPs.
Adspends as percentage of sales will continue to remain ~15% as the company continues
to invest behind its new launches. In our view, if the input cost inflationary scenario
worsens, GSK has adequate buffer to moderate adspends to manage margins in the short
term.
GSK has a distribution reach of ~1.2 mn outlets with direct reach of ~0.65 mn. It is
planning to increase the direct distribution by ~50, 000 outlets per annum.
As of September 2011, the company had net cash of Rs10.6 bn (~Rs250/share). It is
planning capex of Rs2 bn in CY2012E. We continue to believe that the dividend pay out
ratio could potentially increase from the current <50%, considering the (1) strong FCF
generation potential over CY2011—we estimate ~Rs8bn and (2) GSK has demonstrated
its intention by paying a special dividend in CY2010.
Retain ADD, GSK remains our preferred pick
We upgrade our FY2012E estimates by 4% as we build in higher other operating income.
Our EPS estimates for CY2011E and CY2012E are Rs86.6 and Rs104.1 respectively. Reiterate
ADD rating and target price of Rs2,900 (valued at 27X CY2012E for 20% CAGR earnings
growth between CY2010 and CY2013E and potential improvement in dividend payout). Key
risks to our ADD rating are input cost inflation and sustaining high food inflation impacting
discretionary demand.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GlaxoSmithkline Consumer (SKB)
Consumer products
Good show, GSK remains a preferred pick. 3QCY11 was further demonstration of
underlying strong growth trend in malted food drink category—Horlicks volumes
+10%, sales +18%, EBITDA +24%, PAT +31%. Modest price hikes and mix
improvement aided gross margin management (decline of just 70 bps), in our view.
‘Horlicks Gold’, launched a few months back, already forms 3% of Horlicks sales. We
reiterate that the varianting-led growth in MFD category could create value growth
tailwinds as well as mix-improvement-led margin expansion opportunity for GSK. ADD.
Strong brand + good innovations + smart activation = all-round good show
GSK Consumer reported sales of Rs7,201 mn (+18%, KIE est. Rs7,214 mn), EBITDA of Rs1,180 mn
(+24%, KIE est. Rs1,092 mn) and PAT of Rs1,030 mn (+31%, KIE est. Rs909 mn).
Sales growth of 18% was driven by 8% volume growth in the malted food drink (MFD)
category (base quarter had ~19% volume growth) with Horlicks growing by 10% in volumes
and Boost at 5%. The quarter had the benefit of 5% price increase in November 2010 and 3%
in July 2011.
Gross margin management pleasantly surprised us (just 70 bps decline) considering the
significant inflation in most of GSK’s inputs – in 1HFY12; barley prices were up +18% and milk
prices were up +20%. However, sugar price declined 19%. EBITDA margin expanded 87 bps to
16.4% primarily on the back of savings in adspends (97 bps) and benefits of operating leverage
(marginal savings in staff cost (31 bps) and other expenditure (29 bps)). Higher other income of
Rs476 mn is due to higher treasury yields and higher other operating income for distributing
products of GSK Asia (good sales of Sensodyne, Eno and Crocin).
Our optimism continues to be on opportunities in core MFD; limited excitement on new products
As highlighted in our note dated September 9, 2011, ’Proposition-based products – the next
growth driver’, the variants-led growth in malted food drink (MFD) category could create value
growth tailwinds as well as mix improvement-led margin expansion opportunity for GSK. Apart
from the continued success of Junior Horlicks, Mothers Horlicks and Women’s Horlicks in 2QFY12,
GSK had launched ‘Horlicks Gold’ at a 28% premium to core. Horlicks Gold now forms 3% of
Horlicks sales. We continue to believe that “While it is still early days in the lifecycle of these
products, we believe that good performance of these products is a significant positive, as it
demonstrates ability of the company to create demand and increase consumption points.”
While GSK has launched multiple new products such as Actibase, Actigrow, Horlicks Chill
Dood, Nutribar, cream biscuits, Foodles, Boost glucose powder etc., our optimism has
always been on the potential of the malted food drink category (MFD). Most of its new
launches (other than in MFD) are likely witnessing signs of fatigue, in our view.
Biscuits are the only exception and it registered a growth of 18% during the quarter. Foods
portfolio (noodles and biscuits) now comprises ~6% of the company’s sales. Foodles sales
growth was flat during the quarter due to supply chain issues (likely with Indo Nissin). The
company has recently launched oats in South India.
Takeaways from analyst concall
Boost had a marginally disappointing quarter with 5% volume growth. While GSK’s Boost
and Cadbury’s Bournvita have ~15% market share each; Boost has a dominant presence
in South and Bournvita in West. While Boost benefited due to its relaunch in CY2010, the
recently relaunched Bournvita has likely outperformed Boost in 3QCY11, in our view.
Low unit packs (LUP) form 3.5% of sales. The company is primarily marketing these packs
in north and west where its presence is relatively weaker than south and west. While
margins in these packs are lower than bigger packs the company is pushing these
products to aid consumer recruitment though it has not yet seen signs of consumers
uptrading to bigger packs from LUPs.
Adspends as percentage of sales will continue to remain ~15% as the company continues
to invest behind its new launches. In our view, if the input cost inflationary scenario
worsens, GSK has adequate buffer to moderate adspends to manage margins in the short
term.
GSK has a distribution reach of ~1.2 mn outlets with direct reach of ~0.65 mn. It is
planning to increase the direct distribution by ~50, 000 outlets per annum.
As of September 2011, the company had net cash of Rs10.6 bn (~Rs250/share). It is
planning capex of Rs2 bn in CY2012E. We continue to believe that the dividend pay out
ratio could potentially increase from the current <50%, considering the (1) strong FCF
generation potential over CY2011—we estimate ~Rs8bn and (2) GSK has demonstrated
its intention by paying a special dividend in CY2010.
Retain ADD, GSK remains our preferred pick
We upgrade our FY2012E estimates by 4% as we build in higher other operating income.
Our EPS estimates for CY2011E and CY2012E are Rs86.6 and Rs104.1 respectively. Reiterate
ADD rating and target price of Rs2,900 (valued at 27X CY2012E for 20% CAGR earnings
growth between CY2010 and CY2013E and potential improvement in dividend payout). Key
risks to our ADD rating are input cost inflation and sustaining high food inflation impacting
discretionary demand.
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