| Summary of Contents STOCK UPDATE GlaxoSmithKline Consumer Healthcare
Recommendation: Hold
Price target: Rs3,900
Current market price: Rs3,785 Downgraded to Hold Result highlights -
Q4CY2012 results below expectation: GlaxoSmithKline Consumer Healthcare (GSK Consumer)'s Q4CY2012 results were lower than expectations due to a lower than expected operating profit margin (OPM), which was affected by higher other expenditures during the quarter. Around an 18% year-on-year (Y-o-Y) revenue growth gives us an indication that the volume growth must have stood in the range of 7-8% year on year (YoY) during the quarter. The improvement of over 100 basis points YoY in the gross profit margin (GPM) was the highlight of this quarter despite an absurd increase in the wheat and sugar prices in Q3FY2013. -
Performance snapshot: GSK Consumer's Q4CY2012 net sales grew by 17.8% YoY to Rs709.1 crore (largely in line with our expectation of Rs708.1 crore). We believe the volume growth must have stood in the range of 7-8% while the price-led growth might have been close to 10% YoY during the quarter. The core malted food drinks (MFD) segment must have grown by about 18% while the biscuit segment must have grown by about 25% YoY during the quarter. Despite a sharp increase in the prices of the key inputs, such as wheat and sugar, the GPM improved by 161 basis points YoY to 66.0% largely on account of the price hikes undertaken in the MFD segment. The OPM (excluding the business auxiliary income) declined by 310 basis points to 7.1% in Q4CY2012. Hence, the operating profit was down by 17.9% YoY to Rs50.6 crore. However, higher yields on investments resulted in a 36.0% Y-o-Y growth in the other income. Hence, the reported profit after tax (PAT) grew by just 4.9% YoY to Rs69.3 crore (which was lower than our expectation of Rs69.3 crore) during the quarter. -
Successful completion of open offer: GlaxoSmithKline Pte (GSK) along with Horlicks and GSK Plc made a voluntary open offer to acquire 1.34 crore shares (31.84% of the share capital) of GSK Consumer at a price of Rs3,900 per share. The open offer was successful, as the parent company was able to acquire a 29% stake in GSK Consumer. With this the parent company's stake in GSK Consumer has gone up to 72.5%. -
Balance sheet remained strong: GSK Consumer's balance sheet remained strong with negative working capital and improved operating cash flows. The operating cash cycle remained negative at 102 days. The return ratios remained strong with the return on equity (RoE) and return on capital employed (RoCE) standing at 34.9% and 52.0% in CY2012. The company has recommended a dividend of Rs45 per share (a dividend pay-out of 43%) for the year end CY2012. With the cash flows remaining strong, we expect the company to maintain the strong dividend pay-out. -
Downgraded to Hold: In the persistent inflationary environment, we expect GSK Consumer's volume growth in the MFD segment to sustain at higher single digits. However, the low penetration of the segment (especially in the northern and western regions) and the scope for improving the reach in rural areas provide us visibility of a decent volume growth in the long run. Also, the company's continuous focus on enhancing its non-MFD product portfolio would help it to improve its growth prospects in the long run. The key things to monitor in the near term would be the volume growth in the MFD segment and any improvement in the OPM in the coming quarters.
We have broadly maintained our earnings estimates for CY2013 and CY2014. We continue to like GSK Consumer on account of its strong market positioning in the domestic MFD market, healthy balance sheet and strong dividend pay-out. At the current market price the stock is trading at 31.1x its CY2013E earnings per share (EPS) of Rs121.3 and 27.2x its CY2014E EPS of Rs138.7. GSK Consumer's stock price moved up strongly during the open offer period and is currently trading at premium valuation. Hence, we downgrade the stock from Buy to Hold with a price target of Rs3,900.
SECTOR UPDATE Logistics Contraction continues Key points -
After eight consecutive months of contraction, India's export-import (EXIM; exports + non-oil imports) growth re-entered the positive zone in January 2013 by growing at 4%. This growth was largely on the back of a 6% growth in imports (non-oil) along with an export growth of 2%. However, the year-to-date (YTD) growth is still low at -5% year on year (YoY) for April 2012 to January 2013 as against a 28% year-on-year (Y-o-Y) growth during April 2011 to January 2012. -
The total cargo volume at major ports in January 2013 reported a decline of 1% YoY mainly due to a 72% Y-o-Y decline in cargo at Mormugao port. However, New Mangalore (+27%), VO Chidambaranar (+26%), Haldia (+25%), Ennore (+23%), Paradip (+16%), Kolkata (+13%) and Kandla (+13%) ports reported a growth in their cargo traffic. The total cargo volumes reported a decline of 3% YoY to 454MT YTD, ie April 2012 to January 2013. -
The container volumes in January 2013 were flat YoY, thus restricting the declining trend witnessed over the previous four months. However, the YTD (April 2012 to January 2013) contraction of 1% continues to portray a bleak outlook for container volumes. -
The current economic backdrop for logistics players, collaged by the overall weak EXIM trade along with a contraction in cargo volumes (particularly containers), is not an encouraging one. We expect this lacklustre performance to continue in the near term. However, we continue to prefer Gateway Distriparks Ltd (GDL) due to the robust long-term growth potential of each of its business segments, ie container freight station, rail and cold storage. The stock is currently trading at a price earnings (PE) of 8.0x based on its FY2015E earnings per share (EPS) of Rs16.6.
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