Strong results GSK-CH :: Centrum

Strong results
GSK-CH posted Q3CY12 results ahead of our expectations with topline
growth at 15.2% YoY on the back of 6% growth in domestic volume,
35% in the non-MFD segment, 3% in exports and 8% decline in CSD
sales. Gross margin expanded by 62bps which helped boost operating
profit by 75bps to 19.9%. Higher business auxiliary income too
boosted PAT which was up by 25%YoY. Maintain BUY.
Q3CY13 results ahead of expectations: Net sales for the company was ahead of
expectations with 15.2% revenue growth at Rs8577mn led by 6% growth in
volume and 9% in price. Exports grew marginally by 3%. Operating profit was up
by 19.7% at Rs1706mn on the back of gross margin expansion. Auxiliary income
was up by 24% YoY to Rs280mn. PAT was up by 25% and 10% above our estimates
at Rs1286mn.
MFD portfolio growing strong: Domestic MFD portfolio grew by 6% in volume
on the back of 16% (4.5% vol) in Horlicks and 22% (8.5% vol) in Boost sales. The
company increased prices by 5.5% in mid-June across products which helped in
value growth. CSD segment continues to be under pressure with 8% decline in
revenues which had 1.5% negative volume impact. It continues to invest in North,
West India and rural markets for future growth and the current distribution outlets
stand at 7.5lakhs. Sachet sales grew by 45% and formed 5% of total sales and
drove rural growth. Management believes that the premium segment which
accounts for 10% of the industry is growing at a faster clip and the company will
consider entering this segment at a later stage.

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Margin expansion: Operating margin for the company expanded by 75bps on the
back of 62bps gross margin expansion. Gross margin expanded on the back of
lower exports, negative CSD sales, marginal commodity inflation along with cost
optimization. RM cost inflation was 8% during the quarter with milk power
increasing by 7%, malted barley by 6%, wheat flour by 13% and sugar by 20%. For
Q4CY12 management believes that the RM inflation would be 5%. A&P spend was
high on the back of increase in investments for non-MFD products. Employee cost
was up by 17% due to increments given during the last quarter.
Non MFD business gaining traction: Biscuits business grew by 29% during the
quarter on the back of 23% volume growth while Horlicks Oats has been able to
garner 11% market share in south India and currently is the number 3 player in the
market. In noodles, it did a turnover of Rs6mn in Q3CY12 which was down 25% YoY
as the company is focusing on the premium segment with higher gross margins.
Business auxiliary income grew by 24% to ~Rs280mn driven by GSK Asia products
such as Eno, Crocin, Iodex and Sensodyne.
Maintain BUY: We have increased our CY12/CY13 earnings estimates by 2.6%
and 1.7% respectively on the back of increase in auxiliary income and gross
margin expansion. The stock is currently trading at 29x and 24.8x CY12E and
CY13E respectively. We have rolled over our multiple to CY14, valued the stock
at 25x CY14E, with a target price of Rs3626 and maintain BUY rating.