Stock Update

GlaxoSmithKline Consumer Healthcare

Good quarter with traction in new launches

GlaxoSmithKline Consumer Healthcare (GSK Consumer) registered steady

Sector: Consumer Goods
performance in Q3FY2020 as revenue grew by ~4% y-o-y (driven by 3.6%
Result Update domestic volume growth), while OPM expanded by 212 bps to 23.5%,
resulting in a ~14% growth in operating profit. Other operating income
Change consistently grew by double digits on the back of strong performance of
the marketed distributed brands like Eno, Sensodyne, Crocin, Iodex and
Reco: Hold  Otrivin. Export sales, however, declined by 17% y-o-y while biscuit sales
CMP: Rs. 9,238 dropped in double digits as the company has stopped sales of certain SKUs
in the market. Higher other income led to a ~20% growth in profit before tax.
Price Target: Rs. 9,950 á
Horlicks continued to maintain its leadership position in the Health Food
Drinks (HFD) category with a 44.3% market share (improved by 60 bps
á Upgrade  No change â Downgrade
q-o-q). Focus on driving penetration (currently at ~20%) through sachets,
targeting adults to improve household penetration and efforts to enhance
Company details distribution in north and west India will be key revenue and earning drivers
going ahead. The Chandigarh Bench of the National Company Law Tribunal
Market cap: Rs. 38,851 cr (NCLT), at its hearing held on February 03, 2020 has reserved its order on
the scheme of GSK Consumer’s merger with Hindustan Unilever (HUL) and
52-week high/low: Rs. 9465/6868 GSK Consumer is now awaiting the formal order.
NSE volume: Key positives
0.2 lakh
(No of shares)
ŠŠ GSK Consumer remains the market leader in the HFD category with a
BSE code: 500676 66.9% volume share and 55.8% value share.
ŠŠ Despite higher input prices, OPM improved by 212 bps to 23.5%
NSE code: GSKCONS
ŠŠ New launches are gaining good traction; launch of Active Horlicks in the
southern & eastern regions has been gaining encouraging response from
Sharekhan code: GSKCONS
consumers.
Free float:
1.2 cr
Key negatives
(No of shares)
ŠŠ Gross margins dropped by 126 bps mainly on account of higher milk
prices.
Shareholding (%) ŠŠ Exports declined by 17% y-o-y affected by poor performance in
Bangladesh and the Middle East.
Promoters 72.5 Our Call
FII 5.0 Valuation- Maintain Hold with revised price target of Rs. 9,950: We have
broadly maintained our earnings estimates for FY2020 and FY2021. GSK
DII 6.6 Consumer has maintained its focus on launching new products (largely in
the premium space) and enhancing its distribution reach (especially in rural
Others 16.0 markets). After the merger with HUL, there will be lot of synergistic benefits
including distribution enhancement, which will help GSK Consumer’s product
portfolio achieve healthy growth in the near to medium term. We maintain our
Price chart Hold recommendation on the stock with a revised price target of Rs. 9,950
(rolling it over to FY2022E earnings).
10000

9000 Key Risks

8000 Any significant increase in key input prices (including dairy prices) would act
as a key risk to earnings estimates in the near term.
7000

6000 Valuation (Consolidated) Rs cr

Feb-19

Feb-20
Jun-19

Oct-19

Particulars FY18 FY19 FY20E FY21E FY22E

Revenues 4,377 4,782 5,096 5,617 6,190
OPM (%) 20.2 23.9 24.6 24.3 24.6
Price performance Adjusted PAT 700 869 1,152 1,234 1,350
% YoY growth 6.6 24.1 32.6 7.2 9.4
(%) 1m 3m 6m 12m Adjusted EPS (Rs.) 166.5 206.6 273.8 293.5 321
P/E (x) 55.5 44.7 33.7 31.5 28.8
Absolute 13.0 1.9 26.8 27.4
P/B (x) 11.1 9.5 8.3 7.2 6.4
Relative to EV/EBIDTA (x) 30.9 24.1 21.8 20 18
17.5 2.6 17.8 15.3
Sensex RoNW (%) 21.2 22.9 26.2 24.5 23.6
Sharekhan Research,
Research, Bloomberg
Bloomberg RoCE (%) 32.6 34.9 33.3 32.8 31.6
Sharekhan
Source: Company; Sharekhan estimates

February 07, 2020 7

 Stock Update
Revenue grew by 6% y-o-y driven by 3.6% domestic volume growth, efficiencies drive up margins: Revenue grew
by 3.8% to Rs. 1,158.9 crore (slightly lower than our expectation) driven by a mix of volume and value. Domestic HFD
category revenues grew by 6% driven by 3% volume growth. Auxiliary business income grew in strong double digits,
driven by good performance of Sensodyne and Otrivin. Gross margins fell by 126 bps y-o-y to 69.4% as the milk prices
gone up substantially, while OPM improved by 212 bps y-o-y to 23.5% due to lower employee cost and operational
efficiencies. Operating profit grew by 14.1% y-o-y to Rs. 272.1 crore, ahead of our expectations. Other income declined
by 37.7% y-o-y to Rs. 116 crore in Q3FY2020 from Rs. 84.3 crore in Q3FY2019. Thus, double-digit growth in operating
profit and higher other income led to a ~20% growth in PBT to Rs. 367.5 crore. Adjusted PAT grew by 48.4% y-o-y to Rs.
268.6 crore largely due to the benefit of corporate tax rate reduction to 25.2%.
Other conference call highlights
ŠŠ HFD portfolio remains market leader with 67% volume market share and 56% value market share.
ŠŠ Horlicks remained the market leader in the HFD category, gaining market share. The volume and value market
share stood at 51.5% and 44.3%, respectively, driven by innovation and investments behind the brand. Horlicks
Protein continues to gain momentum. Horlicks’ market share improved by 1.1% in volume terms and 0.6% in value
terms.
ŠŠ The volume and value market share for Boost increased to 15.4% and 11.5%, respectively.
ŠŠ New products are gaining good traction and gaining market share. Horlicks Protein Plus has gained 0.6% market
share will clock revenues of Rs. 40 crore in FY2020. Horlicks Growth Plus has 0.3% market share and will be a Rs.
30-40 crore brand by FY2020. Active Horlicks, which was launched in South India and East India gained market
share of 0.7% and 1.4% in respective markets. Boost Ready –to-drink gained market share of 1%.
ŠŠ The company expanded its distribution reach to 2.1 million outlets in Q3YF2020 (2.05 million outlets in Q2FY2020)
from 1.88 million outlets in Q3FY2019.
ŠŠ Sachets (contributing 12% to revenue), are performing well and growing in double digits.
ŠŠ Export sales declined by 16% y-o-y mainly due to subdued performance of Bangladesh, Pakistan, Malaysia and
Sri Lanka. Bangladesh witnessed slowdown in the category while Pakistan’s exports were lower due to political
tensions at the border. In Sri Lanka, the company restructured its product formula and made the value of the product
cheaper in the market and also implemented go-to-market strategy. In Malaysia, there is pipeline de-stocking.
ŠŠ The scheme of amalgamation was filed with the Mumbai and the Chandigarh bench of the NCLT, which is approved
by the Mumbai bench. The Chandigarh Bench of NCLT at its hearing held on February 03, 2020 has reserved its
order on the scheme of merger and GSK Consumer is now awaiting the formal order. Both the companies will work
as a separate entity till the merger process is completed.

Results Rs cr
Particular Q3FY20 Q3FY19 y-o-y (%) Q2FY20 q-o-q (%)
Net Sales 1158.9 1116.8 3.8 1345.1 -13.8
Total operating income 1158.9 1116.8 3.8 1345.1 -13.8
Operating Profit 272.1 238.5 14.1 395.8 -31.3
Other Income 116.0 84.3 37.7 78.1 48.5
EBIDTA 388.1 322.8 20.2 473.9 -18.1
Interest 1.5 0.2 - 1.8 -16.3
Depreciation 19.2 15.8 21.3 20.3 -5.7
PBT 367.5 306.8 19.8 451.8 -18.7
Tax 98.8 125.7 -21.4 106.5 -7.2
Adjusted PAT 268.6 181.1 48.4 345.3 -22.2
Extra ordinary item 8.0 0.0 - 0.0 -
Reported PAT 276.6 221.1 25.1 345.3 -19.9
EPS (Rs.) 63.9 43.0 48.4 82.1 -22.2

GPM (%) 69.4 70.7 -126 70.7 -122

OPM (%) 23.5 21.4 212 29.4 -595
Source: Company

February 07, 2020 8

 Stock Update
Outlook
Volume growth to sustain at 3-5% in near term; gross margin pressure to sustain: We expect GSK Consumer’s
volume growth to sustain at 3-5% in the coming quarters as allied products and new launches are gaining
good traction in the domestic market. Moreover, sachet sales are growing in double-digits, adding to overall
revenue growth. The company is focusing on improving growth in under-penetrated regions such as West
and North India. With the prices of skimmed milk powder and barley expected to remain high, gross margins
are expected to remain under stress in the near term. Steps like freight negotiation and saving at conversion
coupled with efficiencies would help OPM remain stable in the near to medium term

Valuation
We have broadly maintained our earnings estimates for FY2020 and FY2021. GSK Consumer has maintained
its focus on launching new products (largely in the premium space) and enhancing its distribution reach
(especially in rural markets). After the merger with HUL, there will be lot of synergistic benefits including
distribution enhancement, which will help GSK Consumer’s product portfolio achieve healthy growth in the
near to medium term. We maintain our Hold recommendation on the stock with a revised price target of Rs.
9,950 (rolling it over FY2022E earnings).

One-year forward P/E (x) band

12000 40x
11000
10000 35x

9000 30x
8000
25x
7000
6000
5000
4000
3000
2000
Sep-15

Sep-19

Feb-20
Nov-17
Jun-16
May-15

May-19
Dec-14
Mar-14

Mar-17
Oct-16
Aug-14

Aug-18
Apr-18
Jan-16

Jan-19
Jul-17

Source: Sharekhan Research

Peer Comparison
P/E (x) EV/EBIDTA (x) RoCE (%)
Particulars
FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E
Hindustan Unilever 75.3 62.8 53.5 53.3 45.0 38.9 113.2 115.3 106.2
Colgate-Palmolive (India) 49.7 44.9 40.3 29.9 29.3 26.6 71.5 72.2 75.7
GSK Consumer 44.7 33.7 31.5 24.1 21.8 20.0 34.9 33.3 32.8
Source: Company, Sharekhan estimates

February 07, 2020 9

 Stock Update
About company
GSK Consumer is one of the leading players in the domestic HFD category with a close to 65% market share.
Its flagship product Horlicks is a market leader, while Boost is among the top three HFD brands preferred in
India. The company also markets and distributes a range of everyday health products such as Eno, Crocin,
Iodex, Sensodyne, T-minic, Sendocal and Ostocal. The company has a strong presence in the southern
and eastern parts of the HFD market. HUL had acquired controlling stake in GSK Consumer from its parent
company in FY2019 to become a strong player in the domestic foods market.

Investment theme
GSK Consumer has maintained its leadership position in the domestic HFD market with strong brands in
its kitty. The company has negative working capital and strong cash flows. It is a cheery dividend payer as
compared to its peers with an average dividend payout of 43.5% for the last four years. The integration of
GSK Consumer with HUL will take place at the end of the current fiscal. GSK Consumer’s portfolio is expected
to perform well once it comes under HUL’s current distribution system.

Key Risks
ŠŠ Any significant increase in key input prices (including dairy prices) would act as a key risk to the earnings
estimates in the near term.
ŠŠ South India contributes about 60% to overall HFD market; any slowdown in this region would threaten the
revenue and earnings growth in the near term.

Additional Data
Key management personnel
P Dwarakanath Chairman
Navneet Saluja Managing Director
Shanu Saksena Company Secretary
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Life Insurance Corp of India 2.7
2 Vanguard Group Inc 0.8
3 UTI Asset Management Co Ltd 0.8
4 SBI Funds Management Pvt Ltd 0.6
5 FundRock Management Co SA 0.6
6 Nomura Holdings Inc 0.5
7 Goldman Sachs Group Inc 0.4
8 Franklin Resources Inc 0.4
9 Reliance Capital Trustee Co Ltd 0.4
10 ICICI Prudential Life Insurance Co Ltd 0.3
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 07, 2020 10

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