Glaxosmithkline Consumer Healthcare - Q1CY13 Result Update - Cholamandalam Securities

Strong volume growth; rich valuations

- Net sales up 16.6% YoY, up 32.8% QoQ at INR 9.75n, driven by volume growth of ~8%
- Gross margins expanded 280 bps YoY to 62.1% led by price increases
- EBITDA up 11.5% YoY to INR 2.1bn, EBITDA margins down 100 bps to 21.2% due to ad spend
- APAT grew by 18.5% YoY to INR 1.6bn, driven by Other Operating Income up 51% YoY

Revenue beat led by higher volumes

Revenue grew 16.6% YoY to INR 9.7bn on the back of 17% domestic sales growth, which was driven by 8% growth in volumes. Exports, however, disappointed with a growth of just 5% YoY. MFD volumes grew by 8% YoY as flagship brands Horlicks and Boost grew by 7% and 10%, respectively. In value terms, Boost grew by 18% YoY and Horlicks by 23% YoY. Boost is growing faster than Horlicks due to higher ad spend with a higher market share in South India. Packaged foods grew by 24% YoY. GSK Consumer took a 3-4% price hike during the quarter. The share of low unit packs (LUP) has moved from 2% in CY10 to 6% in CY12. This could see further increase as for most other consumer categories, LUPs contribute 25+% to revenues. GSK has also launched Horlicks Pro-mind in the premium malted foods segment.

Higher A&P costs impact EBITDA margin

Though Gross margins expanded by 280bps YoY to 62.1% led by price increases, EBITDA margins declined by 100 bps to 21.2% due to a 350 bps YoY increase in A&SP expenses to 16.9% of revenues. This was primarily due to marketing campaigns for Women's Horlicks and launch of Horlicks Pro-Mind. GSK Consumer is facing a benign cost environment for the first time in over 4 years, with RM inflation at 4%. Management expects RM inflation at similar levels for CY13.

Conference Call Highlights

Demand was driven by rural areas and premium variants. CSD channel grew < 10% but expected to pick up. Discontinued glucose powders and a few biscuit variants. In Foodles, the plan is to focus only on niche multi-grain noodles. Direct reach has now rised to 800,000 outlets. Plans to increase rural reach by 10,000 villages in CY13.

Valuation: While earnings are expected to grow in CY12-14E by ~17-18%, valuations are stretched with P/E close to 30XCY14E. With a target P/E of 27X on consensus CY14E we revise target price upwards to INR 3846 but maintain our UNDERPERFORMER rating on the stock.

Risks: Adverse Raw material, heightened competition & slowdown in discretionary expenditure.

Source : Equity Bulls

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