GSK Consumer - 4QCY2011 Result Update - Reliance Securities

Results marred by one-offs in other expenses and tax

Key highlights of the result

- Top-line growth strong, aided by double digit growth in core brands: GSK Consumer (GSKCHL) posted a robust top-line growth of 18.6% yoy driven by ~16% volume growth in Horlicks (~7% value growth on account of absorption of ~2.5-3% price hikes taken in July, 2011) and ~2% volume growth in Boost (slow volume growth in Boost due to high base). For the full year, the yoy volume /value growth for Horlicks and Boost stood at 12%/18% and 4%/11% respectively. In terms of other brands, Foodles continued to get impacted by the supply issues, while management had indicated focus shifting from Horlicks Nutribar, as GSKCHL feels they are too soon to enter the Nutribar category. Biscuits recorded a good growth of 29% yoy this quarter as per our expectations, and currently contribute ~5% to the total top-line of the company.

- OPM contracts on high advertisement expense and other expense: GSKCHL reported a marginal uptick in the raw material prices as the gross margin contracted by 44bp yoy. Management has indicated that 1QCY2012 is witnessing an increase in raw material prices for the company for all commodities barring wheat. Operating margins registered a sharp contraction of 186bp yoy to 10.2% (12.1%) on high advertisement expense (up 194bp yoy; increase is on expected lines) and high other expenses (up 123bp yoy; management has indicated that the other expenses consists of few one-offs).

- Prior period tax adjustments to the tune of ~Rs5-6cr results in lower than estimated PAT growth: Earnings registered a muted growth of 4.8% yoy largely on account of prior period tax adjustments (pertaining to CY2007) to the tune of ~Rs5-6cr factored in this quarter. The interest expense and depreciation expense were largely in-line with the expectations. The company reported interest expense of ~Rs1cr, while the depreciation expense increased 10.9% yoy to ~Rs12cr (~Rs11cr).

Outlook and Valuation

Post the results we have tweaked our revenue and earnings estimates downwards for CY2012E by 1-2% and introduce our CY2013E estimates in our update. For CY2011-13E, we peg CAGR of 17.5% and 22.2% in top-line and recurring earnings respectively. We expect the advertising expense for GSK Consumer to remain high at ~16% of sales for the given period on account of new launches and increased competition, while raw material expense is expected to remain firm at ~27-28% of sales. However, higher cost efficiencies in terms of tight control on manufacturing, staff cost and other SG&A expenses will help margins to remain stable at ~17-18%. We recommend an Accumulate on the stock with a target price of Rs2,900 based on CY2013E EPS of ~Rs126.

Risks to the view

- Sustained raw material inflation could impact our estimates

- Increased competition in high growth noodles category may impact our margin expectations

- ITC's announcement of entering into MFD category will be a headwind to the stock.

Source : Equity Bulls

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