Glaxo SmithKline Consumer Healthcare - Healthy earnings growth momentum; Buy - Anand Rathi

Healthy revenue growth. GSK Consumer Healthcare reported 17.8% yoy revenue growth. Considering the price hikes by the company, we believe volume growth came at ~8-9%. Despite the lower offtake by the Canteen Stores Department as well as inventory de-stocking by modern trade, the company reported healthy revenue growth.

Higher other expenditure erodes margins. On the 410-bp increase in other expenditure (as percent of net sales), the EBITDA margin was down 300bps yoy. Raw material cost (as percent of net sales) was down 160bps. Due to the withdrawal of some products (Chill Dood, Nutribar), ad-spend as percent of net sales was down 30bps yoy. Other income has expanded 24% yoy. The effective income tax rate was down 658bps yoy. (In 4QCY11 the company had made higher provisions for income tax. This had resulted in an effective tax rate of 39.3%.) Net profit was up 17.9%, yoy.

Promoters' stake increase. In Jan'13 the promoters raised their joint stake from 43.1% to 72.5%. We believe this would expand the valuation range from past averages as we expect a significant increase in dividend payouts as well as a buyback to raise the promoter stake to 75%. A higher promoter stake would make for better sharing of resources of the parent. It would also allow launching consumer products from the parent's basket of consumer products.

Our take. Less penetration as well as per-capita consumption of health-food drinks augur healthy long term growth. Aggressive focus on small SKUs and launch of Rs5 pack are expected to drive rural penetration. We expect revenue and earnings CAGRs of 20% and 25% over CY12-14. Withdrawal of some products would help reduce ad-spend despite raising brand-building activity in core products. We value the stock at Rs. 4,350 (earlier Rs. 3,425) at a target PE of 27x CY14e earnings. Risk: Higher raw material prices and increase in competitive pressure.

Source : Equity Bulls

Keywords