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GlaxoSmithKline Consumer - 3QFY17 Result Update - Weak Demand Accentuated by Demonetization - Reliance Securities

Posted On: 2017-02-16 21:50:44

GlaxoSmithKline Consumer Healthcare (GSK Consumer) has delivered a weak performance in 3QFY17. Its net sales fell by 11.7% to Rs8.2bn, while net profit decreased 8.3% YoY to Rs1.4bn. Marred by demonetization and weak consumer demand environment, its volumes in the core HFD segment fell by 17% in the quarter.

Trimming down our earnings estimate by 7% for FY18E in the wake of poor quarterly performance, we expect GSK Consumer to post modest revenue and earnings CAGR of 2.9% and 6% respectively through FY16-18E. However, considering the Company's market leadership, strong brands and comfortable valuations, we maintain our BUY recommendation on the stock with revised Target Price of Rs5916, which implies an upside of 16% from current levels.

Demonetisation Drags Growth

Overall quarterly volumes declined by 17% YoY, which is attributable to rippling effects of demonetization as the HFD category being discretionary in nature has a higher ticket size compared to conventional FMCG products. Close to half of GSK Consumers' sales come from rural and wholesale channel, which were significant impacted by liquidity crunch post demonetization. The Company supported the trade channels by extending credit and reducing inventory to tide over the crisis situation.

Lower A&P Aid Margins

The Company has largely been able to maintain its overall market shares of ~70%. While Horlicks and its variants have gained market share, Boost has witnessed marginal fall in the same period. Gross margins declined by 110bps YoY to 66.3%, mainly due to higher salience of sachets and commodity inflation. While employee cost remained flat at 13% of sales, A&P spends declined by 220bps YoY to 11.2% of sales. Resultant EBITDA margins rose marginally by 20bps YoY to 15.7%.

Outlook & Valuation

Although, GSK Consumer has had a rough ride in the past two years, we believe that it could recover, going forward on the back of its market leadership, strong brands, increased salience of sachets, improved penetration in North & East and higher pricing power. We expect GSK Consumer to post revenues of Rs39.4bn and Rs43.5bn and net profit of Rs6.9bn and Rs7.6bn in FY17E and FY18E, respectively. Based on expected EPS of Rs180.9, the stock currently trades at 28.2x FY18E earnings. We maintain our BUY recommendation on the stock with revised Target Price of Rs5916, based on 30x Dec-18 EPS.

Shares of GLAXOSMITHKLINE CONSUMER HEALTHCARE LTD. was last trading in BSE at Rs.5118 as compared to the previous close of Rs. 5115.3. The total number of shares traded during the day was 350 in over 128 trades.

The stock hit an intraday high of Rs. 5118.35 and intraday low of 5035. The net turnover during the day was Rs. 1775489.


Source: Equity Bulls

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