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Key points
CY2011 performance – high teens growth: Glaxosmithkline Consumer
Healthcare Ltd (GSK) posted a high-teen growth in its top line and bottom line
during the year. The top line growth of 16.5% year on year (YoY) was driven by
a mix of volume and value. The malted food drinks (MFD) segment (94% of total
revenues) grew by 16.3% YoY, driven by an around 9% YoY volume growth.
Horlicks, which is the company’s flagship brand, grew by around 18% during the
year. The biscuits portfolio had done exceptionally well with a growth of 30% in
CY2011. Though the operating profit margin (OPM) declined by 51bps YoY (to
15.8%), the strong growth in the business’ auxiliary income and interest income
resulted in an 18.5% YoY growth in the bottom line.
Cash conversion cycle improved further: The company’s cash conversion cycle
improved from negative 89 days in CY2010 to negative 100 days in CY2011,
indicating an improvement in working capital management. The creditor days
have increased from around 139 days in CY2010 to 154 days in CY2011. Hence
despite an above 40% growth in loans and advances in the last couple of years,
the company’s ability to generate cash from operating activities has remained
strong. We expect the cash conversion cycle to further improve in the coming
years.
Return ratios remain strong: The return ratios continued to improve with the
return on net worth (RoNW) and return on capital employed (RoCE) up from
32.2% and 48.7% respectively in CY2010 to 33.8% and 51.7% in CY2011.
Cheery dividend player: The company is known to be a cheery dividend payer
in the fast moving consumer goods (FMCG) space. As anticipated the company
has paid a dividend of Rs35 per share in CY2011 (350% of face value). The
dividend payout ratio stood at 41% in CY2011, which has improved in comparison
to its average dividend payout ratio of around 33%. With the profit after tax
(PAT) growth likely to sustain at close to 20%, we expect the dividend pay out
ratio to sustain at around 40% in the coming years.
Maintain positive bias on stock: We have incorporated
the CY2011 balance sheet numbers in our estimates
and the same has not led to any major change in our
earnings estimates. Considering the low penetration
of the MFD category and GSK’s strong presence in it,
we believe the company is well poised to achieve a
top line and bottom line growth of close to 20% each
over CY2011-13. At the current market price the stock
trades at 26.2x its CY2012E earnings per share (EPS)
of Rs101.8 and 22.1x its CY2013E EPS of Rs121.1. We
maintain our Buy recommendation on the stock with a
price target of Rs3,000.
Other key highlights of annual report
MFD segment growth mix of volume and value: The
MFD segment continued to achieve a double-digit
revenue growth. However the growth has been
moderated to high-teens in CY2011 from around
twenties during the CY2008-10 period. The sales
volume growth of the MFD segment slid down to high
single digit at 9% in CY2011 from 13.0% in CY2010. The
lower sales volume is largely on account of price hikes
the company has implemented to pass on higher raw
material prices, which affected the sales volume during
the high inflationary environment. However with food
inflation easing out in the recent past, we expect the
sales volume growth to get back to the double-digit
volume growth trajectory in the coming years.
Exports sustained the growth momentum: Exports
(8% of total revenues) registered a strong growth of
33% YoY to Rs235.4 crore in CY2011. The strong growth
in export sales was mainly on account of higher sales
of the company’s products in countries like Bangladesh
and in the Middle East region, where the company is
trying to improve its penetration. The sales in other
main markets such as Sri Lanka, Nepal and Malaysia
among others remained strong during the year.
Substantial increase in other income: GSK’s other
income has grown at a compounded annual growth rate
(CAGR) of 26% over CY2006-11. This is mainly on
account of strong growth of 27% in the business’
auxiliary income (44% of other income) over the same
period. The strong growth of 33.0% YoY in the business’
auxiliary income in CY2011 was mainly on account of
strong sales of Sensodyne tooth paste and other
products. Also the interest income grew at a CAGR of
57% over CY2006-11.
Focus on R&D: Research and development (R&D)
played a pivotal role in GSK’s success in the MFD
category and has contributed towards a profitable
growth over the years. Through the R&D focus, the
company is diversifying itself from the MFD business
to non MFD segments with new launches in lowly
penetrated - high growing categories such as biscuits,
snacks, health drinks, noodles and oats. The non-MFD
segment currently contributes around 6% of the total
revenues. However with improved penetration and an
increase in the distribution reach, we expect the
contribution of the segment to increase in the coming
years. Also R&D has helped the company to launch
new variants under the existing brands to cater to the
entire consumer pyramid.
Capex plan for CY2012: The company has planned to
expand its manufacturing capacity by 16000 – 18000
tonne per annum to cater to the anticipated growth in
demand for food products in the coming years. The
project is as per schedule and is likely to be complete
in the current year. The company has already incurred
a capital expenditure (capex) of Rs154 crore till
December 2011 (constituting around 65% of the budget
spend). The remaining capex of Rs82 crore would be
incurred in the current year. The funding will be done
through internal cash flows and it is unlikely to impact
the strong dividend payout of the company.
Cash conversion cycle improved further: The loans
and advance of the company grew by 40% in the last
two years. Despite the sharp increase, the company
was able to generate substantial cash at the operating
level, mainly on account of its improvement in the
cash conversion cycle.
Outlook and valuation
We have incorporated the CY2011 balance sheet numbers
in our estimates and the same has not led to any major
change in our earnings estimates. Considering the low
penetration of the malted food drinks category and GSK’s
strong presence in it, we believe the company is well
poised to achieve a top line and bottom line growth of
close to 20% each over CY2011-13. At the current market
price the stock trades at 26.2x its CY2012E earnings per
share (EPS) of Rs101.8 and 22.1x its CY2013E EPS of
Rs121.1. We maintain our Buy recommendation on the
stock with a price target of Rs3,000.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Key points
CY2011 performance – high teens growth: Glaxosmithkline Consumer
Healthcare Ltd (GSK) posted a high-teen growth in its top line and bottom line
during the year. The top line growth of 16.5% year on year (YoY) was driven by
a mix of volume and value. The malted food drinks (MFD) segment (94% of total
revenues) grew by 16.3% YoY, driven by an around 9% YoY volume growth.
Horlicks, which is the company’s flagship brand, grew by around 18% during the
year. The biscuits portfolio had done exceptionally well with a growth of 30% in
CY2011. Though the operating profit margin (OPM) declined by 51bps YoY (to
15.8%), the strong growth in the business’ auxiliary income and interest income
resulted in an 18.5% YoY growth in the bottom line.
Cash conversion cycle improved further: The company’s cash conversion cycle
improved from negative 89 days in CY2010 to negative 100 days in CY2011,
indicating an improvement in working capital management. The creditor days
have increased from around 139 days in CY2010 to 154 days in CY2011. Hence
despite an above 40% growth in loans and advances in the last couple of years,
the company’s ability to generate cash from operating activities has remained
strong. We expect the cash conversion cycle to further improve in the coming
years.
Return ratios remain strong: The return ratios continued to improve with the
return on net worth (RoNW) and return on capital employed (RoCE) up from
32.2% and 48.7% respectively in CY2010 to 33.8% and 51.7% in CY2011.
Cheery dividend player: The company is known to be a cheery dividend payer
in the fast moving consumer goods (FMCG) space. As anticipated the company
has paid a dividend of Rs35 per share in CY2011 (350% of face value). The
dividend payout ratio stood at 41% in CY2011, which has improved in comparison
to its average dividend payout ratio of around 33%. With the profit after tax
(PAT) growth likely to sustain at close to 20%, we expect the dividend pay out
ratio to sustain at around 40% in the coming years.
Maintain positive bias on stock: We have incorporated
the CY2011 balance sheet numbers in our estimates
and the same has not led to any major change in our
earnings estimates. Considering the low penetration
of the MFD category and GSK’s strong presence in it,
we believe the company is well poised to achieve a
top line and bottom line growth of close to 20% each
over CY2011-13. At the current market price the stock
trades at 26.2x its CY2012E earnings per share (EPS)
of Rs101.8 and 22.1x its CY2013E EPS of Rs121.1. We
maintain our Buy recommendation on the stock with a
price target of Rs3,000.
Other key highlights of annual report
MFD segment growth mix of volume and value: The
MFD segment continued to achieve a double-digit
revenue growth. However the growth has been
moderated to high-teens in CY2011 from around
twenties during the CY2008-10 period. The sales
volume growth of the MFD segment slid down to high
single digit at 9% in CY2011 from 13.0% in CY2010. The
lower sales volume is largely on account of price hikes
the company has implemented to pass on higher raw
material prices, which affected the sales volume during
the high inflationary environment. However with food
inflation easing out in the recent past, we expect the
sales volume growth to get back to the double-digit
volume growth trajectory in the coming years.
Exports sustained the growth momentum: Exports
(8% of total revenues) registered a strong growth of
33% YoY to Rs235.4 crore in CY2011. The strong growth
in export sales was mainly on account of higher sales
of the company’s products in countries like Bangladesh
and in the Middle East region, where the company is
trying to improve its penetration. The sales in other
main markets such as Sri Lanka, Nepal and Malaysia
among others remained strong during the year.
Substantial increase in other income: GSK’s other
income has grown at a compounded annual growth rate
(CAGR) of 26% over CY2006-11. This is mainly on
account of strong growth of 27% in the business’
auxiliary income (44% of other income) over the same
period. The strong growth of 33.0% YoY in the business’
auxiliary income in CY2011 was mainly on account of
strong sales of Sensodyne tooth paste and other
products. Also the interest income grew at a CAGR of
57% over CY2006-11.
Focus on R&D: Research and development (R&D)
played a pivotal role in GSK’s success in the MFD
category and has contributed towards a profitable
growth over the years. Through the R&D focus, the
company is diversifying itself from the MFD business
to non MFD segments with new launches in lowly
penetrated - high growing categories such as biscuits,
snacks, health drinks, noodles and oats. The non-MFD
segment currently contributes around 6% of the total
revenues. However with improved penetration and an
increase in the distribution reach, we expect the
contribution of the segment to increase in the coming
years. Also R&D has helped the company to launch
new variants under the existing brands to cater to the
entire consumer pyramid.
Capex plan for CY2012: The company has planned to
expand its manufacturing capacity by 16000 – 18000
tonne per annum to cater to the anticipated growth in
demand for food products in the coming years. The
project is as per schedule and is likely to be complete
in the current year. The company has already incurred
a capital expenditure (capex) of Rs154 crore till
December 2011 (constituting around 65% of the budget
spend). The remaining capex of Rs82 crore would be
incurred in the current year. The funding will be done
through internal cash flows and it is unlikely to impact
the strong dividend payout of the company.
Cash conversion cycle improved further: The loans
and advance of the company grew by 40% in the last
two years. Despite the sharp increase, the company
was able to generate substantial cash at the operating
level, mainly on account of its improvement in the
cash conversion cycle.
Outlook and valuation
We have incorporated the CY2011 balance sheet numbers
in our estimates and the same has not led to any major
change in our earnings estimates. Considering the low
penetration of the malted food drinks category and GSK’s
strong presence in it, we believe the company is well
poised to achieve a top line and bottom line growth of
close to 20% each over CY2011-13. At the current market
price the stock trades at 26.2x its CY2012E earnings per
share (EPS) of Rs101.8 and 22.1x its CY2013E EPS of
Rs121.1. We maintain our Buy recommendation on the
stock with a price target of Rs3,000.
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