GSK Consumer Healthcare - Operating margins disappoint - Centrum

GSK Consumer Healthcare's results for Q2CY13 were below our expectations. The company reported 16.9%YoY growth in revenues, 126bps fall in EBIDTA margin and 12.5%YoY growth in net profit. Volume growth in MFD category was healthy at 7% but high admin & other costs and employee expenses muted gross margin expansion benefits. PAT was high on the back of 36% growth in business auxiliary income. Following the recent fall (20% in last 1 month) in the stock price, we upgrade it to Hold from Sell rating.

Results below expectations: GSK Consumer posted topline in line with our expectations at Rs8529mn, up 16.9% YoY. Operating profit was up by mere 7.2%YoY on the back of 126bps drop in margins. High business auxiliary income boosted PAT to Rs1200mn, up 12.5% YoY (9.4% below expectations).

MFD portfolio posts healthy growth: Volume growth for the MFD portfolio was at 7%YoY while price growth was 10% YoY on the back of price hikes and product mix change. Horlicks grew 19% YoY (9% vol growth) and Boost 15% (5% vol growth). Growth in lower unit packs (up 46% YoY), North & West India performance (up 27% YoY), CSD sales (up 20%) and premium products helped in healthy sales growth.

Management expects volume growth of 7-8% going forward. Packaged Food portfolio grew 19%YoY with oats shooting up 42% YoY and biscuits 19% (17% volume growth).

Operating margins under pressure: Operating margin for the company was down 126bps on the back of 32%YoY increase in employee cost due to one-off wage settlement at one factory while admin & other expenses went up 26% YoY on the back of high 3rd party conversion charges. Gross margins expanded by 203bps as commodity basket inflation was mere 5% during the quarter. Management expects gross margins to remain ~65% in coming quarters.

Other highlights: Packaged Food portfolio grew 19%YoY with oats growing 42% YoY and biscuits 19% (17% volume growth). The company's distribution reach increased to 7.6 lakh outlets.

Estimates increased: We are maintaining our sales growth estimates but increasing operating profit by 3%/3.2% for CY13/CY14 on the back of higher gross margins while we have also increased our emoloyee cost. PAT has been increased by 3.6% for both CY13 & CY14 on the back of higher operating profit and stronger growth in business auxiliary income.

Upgrade to Hold: GSK Consumer is currently trading at 34.3x and 29.4x CY13E and CY14E EPS of Rs129.5 and Rs151 respectively. We upgrade the stock to Hold due to the recent fall in stock price and arrive at a revised target price of Rs4,076 (27x CY14) in-line with its 5-year mean multiple.

Source : Equity Bulls

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