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  1. Sell rating on GSK Consumer; Result belies expectations

Sell rating on GSK Consumer; Result belies expectations

Though EPS estimates for FY17/18 are down 8/9% given higher excise duty, sales could accelerate to 15% CAGR over FY16/20e

By: | Published: May 23, 2016 7:31 AM

GSK Consumer reported sales of Rs 11.1 bn (decline of 9% y-o-y) and adjusted PAT of Rs 1.8 bn (down 8% y-o-y), both of which disappointed our expectations. Underlying sales growth came in at +1.5% y-o-y, indicating possible excise duty impact of ~11%. We believe volumes declined by ~6% y-o-y in Q4.

Despite the decline, GSK saw value share gain of 0.9% y-o-y in Health Food Drinks (HFD) in the last 12 months, indicating category growth has slowed materially. While Horlicks gained share, Boost seems to have lost 20-30bps value share y-o-y. We expect HFD to benefit from DBT-induced rural growth. However, GSKCH faces headwinds of: (i) market share saturation in South and East; (ii) intense competition from peers like Abbott and Complan in North and West; (iii) RoCE dilution given capital misallocation risks. We have reduced FY17/18 EPS estimates by 8%/9% factoring in higher excise duty. TP reduced to R5,500 (10% downside, SELL).

Volume growth slows; Horlicks gains share while Boost loses share: GSK Consumer’s Q4FY16 sales of R11.1 bn (-9% y-o-y) was 16% below our estimate, while PAT of R1.8 bn (-8% y-o-y) was 19% below estimate. Underlying sales grew by only 1.5% y-o-y, excluding a possible ~11% excise duty impact. According to our estimates, volumes for the quarter de-grew ~6% y-o-y. Auxiliary income growth also moderated to 10% y-o-y. Gross margins increased by 128bps y-o-y to 68.8% due to lower input costs and better mix. Ebitda margin contracted by 57bps y-o-y to 21.1% as the company increased its A&P spends 5% y-o-y. GSKCH gained 0.9% value share over the last 12 months in the HFD category. This was led by the base Horlicks version (0.7%) and its extensions (0.5%). However, Boost seems to have lost 20-30bps value share y-o-y. Volume de-growth despite the market share gain signifies that HFD category growth slowed down materially during the last 12 months, possibly due to weak macro demand.

Where do we go from here?

Beneficiary of increased rural spends on packaged foods following DBT: We expect categories like biscuits and HFD to face a sizeable tailwind after the DBT implementation. GSK Consumer is likely to benefit the most in HFD due to: (i) ~30% of sales are from rural areas; it has a dominant position with ~60% overall market share; (ii) increasing rural distribution (current reach of 27,000 villages vs 16,000 in FY14); and (iii) consumer connect programmes such as Horlicks Swasthya Abhiyan (HSA). As a result, we expect sales to accelerate to 15% CAGR over FY16-FY20e vs 5% over FY14-FY16.

In the longer term, GSK faces the following issues:

Limited room for penetration-led growth in MFD category; increased consumption to drive growth: GSK derives >80% of its sales from South and East India where it holds ~75% market share (vs ~30% in North and West India) in the Malt-based Food Drinks (MFD) category. GSK faces possible growth moderation due to: (i) market share saturation in MFD in South and East India, (ii) weak presence in premium MFD with rising competitive intensity from peers such as Abbott; and (iii) GSK’s inability to counter Complan’s threat in brown powder MFD in North and West.

Risks around capital misallocation given over Rs 27 bn surplus cash: GSK has accumulated Rs 27 bn cash on its balance sheet by maintaining a low dividend payout ratio. Given unsuccessful attempts at diversifying beyond the MFD segment, the surplus cash would either remain unutilised or be deployed towards M&As and hence is likely to result in meaningful dilution in RoCE for the firm.

Positives fully priced in; retain SELL with a TP of Rs 5,500: Whilst we appreciate the sales growth potential from increased rural spends, given headwinds from category growth moderation and possible RoCE dilution, we do not see significant upside from current valuations of 36x/31x FY17/18e P/E (price-to-earnings ratio). We have reduced FY17/18 EPS estimates by 8%/9% to factor in higher excise duty. Our TP has been reduced by 6% to R5,500 (implying 32x FY17e P/E; 10% downside; SELL), factoring in sales/EPS CAGR of 15% over FY16-20e.

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