Glaxo SmithKline Consumer Healthcare Ltd - GEPL Capital

Q4CY11 – Sustained 12% volume growth in MFD, high ad spends restrict margin expansion

- Net sales grew 19.2% Y-o-Y to Rs.6.2 bn on the back of 12% volume growth.

- Reported gross margins declined 24bps Y-o-Y to 65.7% as price increases in Boost and Horlicks negated most of RM inflation.

- EBITDA increased by 12.7% Y-o-Y to Rs.844 mn as against Rs.749 mn in Q4CY10. EBITDA margin was down by 77bps Y-o-Y to 13.5%.

- PAT grew by 10.7% Y-o-Y to Rs.591 mn. PAT margin contracted 72bps Y-o-Y to 10.7%. Increase in tax rate restricted PAT growth.

- On the full year basis sales grew by 16.7% to Rs.27.7 bn and net profit recorded growth of 18.7%. EBITDA margins contracted by 30bps to 18.4%.

Result Highlights

Sales growth at 19% Y-o-Y led by 18% Y-o-Y growth in Horlicks brand

Sales growth reported growth of 19% Y-o-Y supported by 18% Y-o-Y growth in Horlicks and 11% Y-o-Y growth in Boost in MFD segment. Exports recorded strong growth of 33% Y-o-Y in Q4CY11. In non MFD segment, Biscuits recorded the growth of 29% Y-o-Y during the quarter while Foodles sales were flat for quarter. Company plans to revisit the Foodles in terms of cost structure and re-launch it later.

Volume growth sustained at 12% Y-o-Y

GSK reported 19% Y-o-Y revenue growth, resulting from 12% Y-o-Y volumes growth and 7% Y-o-Y price and mix growth. Horlicks volumes grew 16% Y-o-Y while boost volume grew 2% Y-o-Y. Management expects MFD volume growth to sustain 8-9% over medium term.

Increase in Ad spends and other expenditure restricted margin expansion

EBITDA margin contracted by 77bps Y-o-Y due to 13.5% 27.6% Y-o-Y increase in ad spends (126bps to 18.3% of sales) and increase in other exp (106bps Y-o-Y to 18.3% of sales). However this decline was restricted by decrease in staff cost (174bps to 9.9% of sales). PAT grew by 10.7% Y-o-Y to Rs.591 mn. PAT margin contracted 72bps Y-o-Y to 10.7%. Increase in tax rate due to prior period adjustments, restricted PAT growth.

Valuation & Viewpoint

GSK consumer is well positioned with strong position in Malted Health drinks category and actively seeking to grow in other categories. Though new launches are yet to witness significant success, we expect GSK Consumer to register double digit sales growth in medium term. However high RM cost and investments in new products will restrict margin expansion. Company is planning to push the rural growth and improve product mix to keep growth momentum intact. The stock is trading at 21.8x multiple of CY13 consensus EPS of Rs.121.

Source : Equity Bulls

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