Strong pricing power, Attractive valuations "BUY" February 09, 2016 Amnish Aggarwal amnishaggarwal@plindia.com +91 22 66322233 Gaurav Jogani gauravjogani@plindia.com +91 22 66322238 Rating BUY Price Rs5,837 Target Price Rs6,940 Implied Upside 18.9% Sensex 24,021 Nifty 7,298 (Prices as on February 09, 2016) Trading data Market Cap. (Rs bn) 245.5 Shares o/s (m) 42.1 3M Avg. Daily value (Rs m) 97.5 Major shareholders Promoters 72.46% Foreign 10.23% Domestic Inst. 2.34% Public & Other 14.97% Stock Performance (%) 1M 6M 12M Absolute (10.6) (7.4) 3.2 Relative (7.0) 7.6 18.1 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 191.3 189.8 0.8 2018 215.0 219.1 1.9 Price Performance (RIC: GLSM.BO, BB: SKB IN) (Rs) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Apr 15 Source: Bloomberg Aug 15 Feb 16 We are increasing FY16 and FY17 EPS estimates by 2.4 5.7% factoring in benefits of price increase and Novartis OTC business. GSK continues to gain share in MFD segment due to stronghold of Horlicks and Boost. However, 11% price increase in the past six months and likely entry of Patanjali remains a concern. Although SMP prices are down 18% YoY and remain benign, gradually increasing barley, sugar and wheat prices will cap further increase in gross margins, in our view. We expect GSK to sustain leadership led by strong brands, innovations and rising distribution reach; expect 12% PAT CAGR over FY16 18 due to peak margins in FY16. We remain positive given that GSK has 1) Valuations (28.2xDec17EPS) at a discount to coverage universe 2) strong leadership in MFD segment 3) 22% PAT CAGR in past 10 years and 4) likely upside from Novartis OTC business. Retain Buy Revenues up 1.7%, Adj.PAT up 36.8%: Revenues increased 1.7%, 7% adjusted for phase out of excise duty benefits, despite 1% impact of Chennai floods. Gross margins increased 400bps to 70.5%. EBITDA margins increased 500bps as 590bps higher employee cost was neutralised by 520bps lower ad spend and 180bps lower other expenses. EBITDA increased 50.9%. PBT grew by 37.5% on muted increase of 5.3% in depreciation and 3.8% in financial other income. Adj. PAT grew by 36.8 % at Rs1.38bn as tax rate increased by 30bps to 34.9%. Concall Takeaways: 1) MFD Volumes were flat, ( 1.5% in Q2). 2) Rural demand remains benign, small packs are impacted the most 3) Q3 auxiliary income increased by 9% due to pipeline correction in OTC products 4) Chennai floods impacted sales by 1% as 90% of Boost sales is from South India (Tamil Nadu is 45%) 4) GSK has increased MFD prices by 6% from Jan2016 post a 5% increase taken in July2015 5) GSK has added 108000 outlets in, taking the total reach to 3.3m 6) Novartis OTC products will be marketed by GSK from July and are expected to have retail sales of >Rs1bn in FY17 7) Malt, Wheat and Sugar prices are up 1 6%, SMP prices are down 18% YoY. Key financials (Y/e March) 2015 2016E 2017E 2018E Revenues (Rs m) 43,076 44,889 50,892 57,811 Growth (%) (11.5) 4.2 13.4 13.6 EBITDA (Rs m) 7,301 9,016 10,203 11,549 PAT (Rs m) 5,836 7,161 8,045 9,041 EPS (Rs) 138.8 170.3 191.3 215.0 Growth (%) (13.5) 22.7 12.3 12.4 Net DPS (Rs) 55.0 70.0 85.0 100.0 Profitability & Valuation 2015 2016E 2017E 2018E EBITDA margin (%) 16.9 20.1 20.0 20.0 RoE (%) 29.7 31.2 30.2 29.7 RoCE (%) 29.6 31.1 30.1 29.6 EV / sales (x) 5.7 5.5 4.8 4.2 EV / EBITDA (x) 33.6 27.1 24.0 21.2 PE (x) 42.1 34.3 30.5 27.2 P / BV (x) 11.6 9.9 8.6 7.6 Net dividend yield (%) 0.9 1.2 1.5 1.7 Source: Company Data; PL Research Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Sales up 1.7% despite Chennai floods and 530bps impact of excise benefit phase out, EBITDA margins expands 500bps YoY gr. (%) 9MFY16 9MFY15 YoY gr. (%) Net Revenue 10,295 10,125 1.7 11,257 32,002 30,921 3.5 Gross Profit 7,255 6,730 7.8 7,524 22,023 19,875 10.8 % of NS 70.5 66.5 66.8 68.8 64.3 Advertising & Promotion 1682 2180 (22.9) 1856 5030 5347 (5.9) % of NS 16.3 21.5 16.5 15.7 17.3 Total Expenses 8,697 9,066 (4.1) 8,880 26,038 26,258 (0.8) % of NS 84.5 89.5 78.9 81.4 84.9 EBITDA 1,598 1,059 50.9 2,377 5,964 4,663 27.9 Margins % 15.5 10.5 5.1 21.1 18.6 15.1 Depreciation 138 131 5.3 137 429 372 15.3 Interest 2 2 5.3 2 6 6 8.8 Financial other Income 569 548 3.8 574 1,691 1,624 4.1 PBT 2,026 1,474 37.5 2,812 7,220 5,909 22.2 Tax 708 510 38.9 968 2,508 2,041 22.9 Adjusted PAT 1,319 964 36.8 1,843 4,712 3,868 21.8 sales grew 1.7%, 7% excluding excise impact, HFD gained 1.1% market share Exhibit 2: Poor demand environment, Floods and excise phase out impacts sales growth 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Net Sales (Rs m) YoY gr. (%) (RHS) 18.2 18.3 14.8 16.5 9.8 8.5 8.5 8.2 10,141 8,690 11,198 9,660 11,136 10,125 12,155 10,450 11,257 10,295 20.0 15.0 10.0 5.0 1.1 1.7 0.0 Q5FY14 Domestic MFD volumes were flat due to poor sachets and Boost sales Exhibit 3: Volumes remains sluggish as sachet prices and Chennai floods impact sales 14 12 10 8 6 4 2 0 2 4 13 12 7 5 2 1 0 0 Q5FY14 1.5 0 February 09, 2016 2
Benign SMP, price increases and malt prices help to boost gross margins Exhibit 4: Gross margins up 400bps due to benign input cost Gross Margin (%) EBITDA Margin (%) (RHS) 72.0 70.0 68.0 66.0 64.0 62.0 60.0 58.0 10.2 64.7 20.5 62.7 17.0 17.6 63.6 62.9 10.5 66.5 21.7 67.5 19.0 69.3 21.1 66.8 15.5 70.5 25.0 20.0 15.0 10.0 5.0 0.0 Staff cost up by 590bps, Ad spends down 520bps and other expenditure down by 180bps Exhibit 5: Overheads: Ad spends down 23%; staff cost up 73% 60.0 Staff Costs (%) Advertising Spend (%) Other Exp (%) 50.0 40.0 30.0 20.0 10.0 0.0 26.1 26.1 24.3 20.2 16.6 21.0 20.5 19.3 24.4 18.3 16.1 19.0 16.6 14.6 15.7 21.5 15.0 14.3 16.5 16.3 9.2 9.5 9.0 10.9 9.1 8.4 11.5 11.6 10.9 14.3 Exhibit 6: Sugar Prices: down 6.4% YoY and up 12.1% QoQ (Rs / MT) 3,600 3,400 3,200 3,000 2,800 2,600 2,400 2,200 3,355 3,380 3,215 2,750 2,838 2,843 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Mar 15 Apr 15 May 15 Jul 15 Aug 15 Sep 15 Nov 15 Jan 16 3,215 Source: Bloomberg, PL Research February 09, 2016 3
SMP prices are down 62% from its peak of Rs294.7/Kg Exhibit 7: Skimmed Milk Powder are down 21.6% YoY and up 2.2% QoQ 330.0 (Rs / Kg) 294.7 280.0 234.6 230.0 193.9 180.0 158.8 130.0 122.9 80.0 101.9 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Apr 15 Aug 15 Source: Bloomberg, PL Research Exhibit 8: Barley Prices are up 16.9% QoQ and down 8.1% YoY (Rs / Quintal) 1,700 1,620 1,600 1,500 1,414 1,400 1,300 1,200 1,526 1,506 1,100 1,133 1,000 Aug 13 Sep 13 Nov 13 Dec 13 Feb 14 Mar 14 May 14 Jun 14 Aug 14 Sep 14 Nov 14 Dec 14 Mar 15 May 15 Jul 15 Sep 15 Jan 16 Source: Bloomberg, PL Research Exhibit 9: EPS increased by 0.4 5.7% factoring benefits of price increase and Novartis OTC business FY16E FY17E FY18E Earlier New % Change Earlier New % Change Earlier New % Change Net Sales (Rs m) 44,502 44,889 0.9% 49,956 50,892 1.9% 57,234 57,811 1.0% Sales Growth (%) 3.3 4.2 12.3 13.4 14.6 13.6 Gross margin (Rs m) 30,210 30,710 1.7% 33,818 34,356 1.6% 38,698 38,933 0.6% Gross Margin (%) 67.9 68 68 68 68 67 EBITDA (Rs m) 8,674 9,016 3.9% 10,015 10,203 1.9% 11,548 11,549 0.0% EBITDA Margin (%) 19.5 20.1 20.0 20.0 20.2 20.0 PAT (Rs m) 6,772 7,161 5.7% 7,835 8,045 2.7% 9,007 9,041 0.4% PAT Growth (%) 16.0 22.7 15.7 12.3 15.0 12.4 EPS (Rs) 161.0 170.3 5.7% 186.3 191.3 2.7% 214.2 215.0 0.4% Source: PL Research February 09, 2016 4
Income Statement (Rs m) Net Revenue 43,076 44,889 50,892 57,811 Raw Material Expenses 11,771 10,813 12,719 14,543 Gross Profit 31,305 34,076 38,173 43,268 Employee Cost 4,313 5,028 5,547 6,359 Other Expenses 19,691 20,033 22,423 25,360 EBITDA 7,301 9,016 10,203 11,549 Depr. & Amortization 621 610 665 720 Net Interest (2,211) (2,401) (2,604) (2,815) Other Income 2,219 2,409 2,611 2,822 Profit before Tax 8,891 10,807 12,141 13,644 Total Tax 3,055 3,646 4,096 4,604 Profit after Tax 5,836 7,161 8,045 9,041 Ex Od items / Min. Int. Adj. PAT 5,836 7,161 8,045 9,041 Avg. Shares O/S (m) 42.1 42.1 42.1 42.1 EPS (Rs.) 138.8 170.3 191.3 215.0 Cash Flow Abstract (Rs m) C/F from Operations 9,602 7,957 9,777 10,756 C/F from Investing (6,455) (4,088) (5,294) (5,846) C/F from Financing (2,939) (3,524) (4,284) (5,042) Inc. / Dec. in Cash 208 345 199 (131) Opening Cash 151 359 704 903 Closing Cash 359 704 903 774 FCFF 7,677 6,437 8,937 9,936 FCFE 7,677 6,437 8,937 9,936 Key Financial Metrics Growth Revenue (%) (11.5) 4.2 13.4 13.6 EBITDA (%) (16.3) 23.5 13.2 13.2 PAT (%) (13.5) 22.7 12.3 12.4 EPS (%) (13.5) 22.7 12.3 12.4 Profitability EBITDA Margin (%) 16.9 20.1 20.0 20.0 PAT Margin (%) 13.5 16.0 15.8 15.6 RoCE (%) 29.6 31.1 30.1 29.6 RoE (%) 29.7 31.2 30.2 29.7 Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) (64) (55) (53) (55) Valuation PER (x) 42.1 34.3 30.5 27.2 P / B (x) 11.6 9.9 8.6 7.6 EV / EBITDA (x) 33.6 27.1 24.0 21.2 EV / Sales (x) 5.7 5.5 4.8 4.2 Earnings Quality Eff. Tax Rate 34.4 33.7 33.7 33.7 Other Inc / PBT 25.0 22.3 21.5 20.7 Eff. Depr. Rate (%) 5.9 5.0 5.0 5.1 FCFE / PAT 131.5 89.9 111.1 109.9. Balance Sheet Abstract (Rs m) Shareholder's Funds 21,130 24,744 28,481 32,454 Total Debt Other Liabilities (944) (1,065) (1,201) (1,353) Total Liabilities 20,186 23,678 27,280 31,101 Net Fixed Assets 5,341 6,471 7,806 10,086 Goodwill Investments 22,606 24,953 28,247 31,092 Net Current Assets (7,760) (7,746) (8,773) (10,078) Cash & Equivalents 359 704 903 774 Other Current Assets 10,846 11,727 13,209 14,612 Current Liabilities 18,966 20,177 22,885 25,464 Other Assets Total Assets 20,186 23,678 27,280 31,101 Quarterly Financials (Rs m) Y/e March Net Revenue 12,155 10,450 11,257 10,295 EBITDA 2,638 1,989 2,377 1,598 % of revenue 21.7 19.0 21.1 15.5 Depr. & Amortization 249 154 137 138 Net Interest 2 2 2 2 Other Income 595 549 574 569 Profit before Tax 2,982 2,383 2,812 2,026 Total Tax 1,015 832 968 708 Profit after Tax 1,968 1,550 2,194 1,319 Adj. PAT 1,968 1,550 1,843 1,319. February 09, 2016 5
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