GSK Consumer: Volumes pressure to continue

Benign input costs will aid profitability; valuations cap significant upsides

Weak volume growth impacted GlaxoSmithKline Consumer Healthcare’s revenue growth in the June quarter. Analysts estimate volume growth at two to three per cent, in line with the trend in recent quarters. The withdrawal of excise duty benefits too acted as a dampener. “The phasing out of excise duty benefit started in May and is likely to impact revenue by Rs 150 crore in FY16 and Rs 100 crore in FY17,” believes Abneesh Roy of Edelweiss Securities.

Consequently, revenue grew only 7.5 per cent over a year to Rs 990 crore, lowest growth in seven quarters and missing the Bloomberg consensus estimate of Rs 1,058 crore by 6.4 per cent. However, strong operating performance, aided by lower input cost inflation, falling advertisement spends (as a percentage of sales) and higher other income enabled net profit to meet Street expectation and it grew 19 per cent to Rs 155 crore. Benign milk and wheat prices translated into a 220 basis points (bps) expansion in earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin to 20.1 per cent.



Positively, the company gained 100 bps market share in the health food drink category compared to last year. Base Horlicks, Boost and Women's Horlicks were the three brands witnessing market share improvement.  

Analysts are enthused by strong market positioning of GSK Consumer’s core brands. The company will gain from revival in the urban economy, but gradually. However, it has gone slow on innovation and has a weak presence in the premium segment, dominated by Abbott's Pediasure. In the face of intensifying competition from peers such as Complan and Abbott, this could be a downside risk.

In FY16, analysts expect revenue and net profit to grow 10.5 per cent and 18.6 per cent, respectively, aided by strong operating performance. Benign input costs is likely to drive an Ebitda margin expansion to about 19 per cent, estimate analysts.

At 38 times the FY16 estimated earnings, the stock appears fairly valued. Half the analysts polled by Bloomberg in August so far have a ‘neutral’ rating on the stock, the rest recommending a ‘buy’. Their average target price of Rs 6,491 indicates a marginal rise of three per cent from current levels.