1QCY2012 Result Update | FMCG

May 11, 2012

GSK Consumer
Performance Highlights
(` cr) Revenue EBITDA OPM (%) PAT
Source: Company, Angel Research

NEUTRAL
CMP Target Price
1QCY11 710 145 20.5 111 % yoy 14.5 11.3 (58)bp 19.3 Angel Est 840 169 20 129 % Diff (3.2) (4.2) (21)bp 2.4

`2,773 -

1QCY12 813 162 19.9 132

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

FMCG 11,661 0.3 2940/2136 5,899 10 16,293 4,929 GLSM.BO SKB@IN

For 1QCY2012 GSK Consumer posted a 14.5 yoy growth in its net sales, aided

by a 7% volume growth and 8% value growth. The companys major brands in malted food drink (MFD) division Horlicks and Boost posted volume growth of 9.4% and 2.1% respectively. During the quarter sales was to an extent affected by stoppage of orders from Canteen Sales Division (CSD) during February and March, which contributes around 8% of overall sales. Adjusted for lower CSD sales implied volume growth stands at 9.5%. We maintain our
Neutral view on the stock. Key highlights of the quarter: GSK consumer recorded an 58bp yoy decrease in its operating margin to 19.9% due to inventory pipeline and higher input costs. However, lower advertising costs (down 120bp yoy) propped up the companys margins to a considerable extent. The companys advertising expenditure in 1QCY2011 included spends on now discontinued brands such as Nutribar. Earnings for the quarter grew by 19.3% yoy to `132cr (`111cr) aided by higher other income (up 40.8% yoy), business auxiliary income and lower tax rate. Outlook and valuation: We expect the companys MFD division to continue to post double digit growth, aided by the companys effort to strengthen its distribution network. At the CMP, the stock is trading at 22.5x CY2013E EPS of `123.2. We continue to remain neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 43.2 16.5 15.7 24.6

Abs. (%) Sensex SKB

3m 5.7

1yr

3yr 39.5

(8.2) (12.3)

24.8 246.6

Key Financials
Y/E March (` cr) Net Sales % chg Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

CY2010
2,306 20.0 300 30.1 16.3 71.2 38.9 12.1 32.2 36.9 4.6 28.4

CY2011
2,686 16.5 362 20.8 15.8 86.0 32.2 10.2 33.8 37.2 3.9 24.9

CY2012E
3,124 16.3 433 19.6 17.1 102.9 26.9 8.3 34.0 39.1 3.4 19.9

CY2013E
3,663 17.3 518 19.7 17.6 123.2 22.5 6.7 32.8 38.0 2.8 16.1
Amit Patil 022-39357800 Ext: 6503 [email protected]

V Srinivasan
022-39357800 Ext: 6831 [email protected]

Please refer to important disclosures at the end of this report

GSK Consumer | 1QCY2012 Result Update

Exhibit 1: Quarterly performance

Y/E Dec. (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Advertising (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM (%) Interest Depreciation Other Income PBT (excl. Extr. Items) Extr. Income/(Expense) PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Equity shares (cr) Reported EPS (`)

1QCY12 813 330 40.6 66 8.1 109 13.4 146 17.9 651 162 19.9 1.2 12 48 196 196 24.2 64 32.8 132 16.2 4.2 31.3

1QCY11 710 270 38.1 62 8.8 104 14.6 129 18.1 565 145 20.5 0.7 11 34 168 168 23.6 57 34.0 111 15.6 4.2 26.3

% yoy 14.5 22.3 5.8 5.4 13.4 15.3 11.3 78.8 9.1 40.8 17.1 17.1 12.9 19.3

CY11 2,686 1,022 38.1 258 9.6 437 16.3 542 20.2 2,260 426 15.9 3.5 46 164 540 540 20.1 185 34.2 355 13.2 4.2

CY10 2,306 865 37.5 230 10.0 371 16.1 464 20.1 1,929 377 16.3 2.6 40 117 452 452 19.6 152 33.6 300 13.0 4.2 71

% chg 16.5 18.2 12.5 18.0 16.8 17.1 13.0 33.5 15.8 39.9 19.6 19.6 21.8 18.5

19.3

84

18.4

Source: Company, Angel Research

Lower CSD orders affects sales growth: GSK Consumer posted top-line growth of 14.5% yoy to `813cr (`710cr), led by 7% volume growth and ~8% value growth.

During the quarter sales was to an extent affected by lower orders from CSD (contributes around 8% of overall sales), adjusting for which volume growth would be 9.5%. During the quarter, CSD placed no orders in February and March due to budget constraints. However, GSK Consumer said that normalcy has been restored in April.
During the quarter, the major brands in the MFD category Horlicks and Boost posted volume growth of 9.4% and 2.1% respectively. Horlicks and Boost have market share of 47% and 14% respectively. Horlicks Oats has been extended to the whole of South India and has a market share of ~12%. Currently, Horlicks Oats occupy the third spot in the Oats category in South India behind Saffola Oats and Quaker Oats. The biscuits division grew by ~21% yoy. The company has discontinued the sale of Nutribar.

GSK Consumer has added 1,00,000 outlets over the last one year and currents has ~7,00,000 outlets across the country. The company is looking to strengthen its distribution chain by adding add another 20,000 outlets in this quarter.

May 11, 2012

GSK Consumer | 1QCY2012 Result Update

Exhibit 2: Top-line growth at 14.5% yoy

900 800 700 600 (` cr) 500 400 300 200 100 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 20.0 (yoy %) (yoy %) 15.0 10.0 5.0 25.0

Top-line (LHS) Source: Company, Angel Research

yoy growth (RHS)

Exhibit 3: Muted volume growth in 1QCY2012

25 20 15 (%) 10 5 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 -

Volume (LHS) Source: Company, Angel Research

Value (RHS)

Higher input costs and inventory pipeline results in margin contraction: During 4QFY2012 GSK consumer recorded an 58bp yoy decrease in its operating margin to 19.9%. The current quarter witnessed a significant reduction in the inventory of semi finished and finished goods on account of plant shutdown due to the expansion activity. OPMs were under pressure also on account of higher cost of inputs. However, lower advertising costs (down 120bp yoy) propped up the companys margins to a considerable extent. During 1QCY2011 the companys advertising expenditure included spends on now discontinued brands such as Nutribar. Earnings growth aided by higher other income: Earnings for the quarter grew by 19.3% yoy to `132cr (`111cr) aided by higher other income (up 40.8% yoy), business auxiliary income and lower tax rate.

May 11, 2012

GSK Consumer | 1QCY2012 Result Update

Exhibit 4: PAT grows by 19.3% yoy

150 130 110 (` cr) 90 70 50 30 10 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 70.0 60.0 50.0 (yoy %)

Exhibit 5: Gross margin and OPM

70.0 60.0 50.0 (%) 40.0 30.0 20.0 10.0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 15.1 16.4 15.5 11.5 20.5 15.1 16.4 10.2 19.9 59.4 62.1 62.8 64.9 61.9 59.4 62.1 64.4 59.4

40.0 30.0 20.0 10.0 -

PAT (LHS)

yoy growth (RHS)

OPM

Gross margin

Source: Company, Angel Research

Source: Company, Angel Research

Investment rationale
Anchor brands to perform well coupled with new launches: We expect GSK Consumer to perform well with its anchor brands Horlicks and Boost. Also, with the launch of innovative and premium products, the company tends to maintain its margins and market share. In the MFD category, we expect Horlicks and Boost to maintain double digit growth. Though the company has pricing power, innovative launches such as small pack sizes will help the company garner a market share in rural markets and penetrate new areas. Margins to improve going ahead: GSK Consumers margins declined in CY2011 due to the increase in input costs. However, we expect margins to expand by 180bps over CY2011-13E.

Outlook and valuation

We expect the companys MFD division to continue to post double digit growth, aided by the companys effort to strengthen its distribution network. At the CMP, the stock is trading at 22.5x CY2013E EPS of `123.2. We continue to remain neutral on the stock.

Exhibit 6: Change in estimates

Old estimates (` cr) Revenue OPM (%) EPS (`) CY2012E 3,111 16.9 100.6 CY2013E 3,648 17.1 117.9 New estimates CY2012E 3,124 17.1 102.9 CY2013E 3,663 17.6 123.2 % chg CY2012E 0.4 20bp 2.3 CY2013E 0.4 50bp 4.5

Source: Company, Angel Research

May 11, 2012

GSK Consumer | 1QCY2012 Result Update

Exhibit 7: One-year forward P/E chart

35.0 30.0 25.0 20.0 (x) 15.0 10.0 5.0 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 PAT 18.2 34.3 13.8 15.1 26.7 20.8 17.3 16.0 25.1 18.3 8.8 Jun-07 Jun-08 Jun-09 Jun-10 Sep-07 Sep-08 Sep-09 Sep-10 Jun-11 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Sep-11 8.7 Dec-11

Source: Company, Angel Research, Note: Blue line indicates 5-year average

Exhibit 8: Peer valuation

Company Asian Paints Britannia Colgate Dabur India Godrej Con GSK Con* HUL ITC Marico Nestle* TGBL Reco. Neutral Buy Neutral Neutral Neutral Neutral Neutral Accumulate Neutral Neutral Buy Mcap (` cr) 34,709 6,444 16,087 18,239 17,561 11,661 93,128 182,275 10,958 43,818 6,697 CMP (`) 3,619 540 1,183 105 519 2,773 431 234 178 4,545 108 TP (`) 650 252 136 Upside (%) 20 8 26 P/E (x) CY12E 30.2 25.6 28.8 25.4 22.9 26.9 30.8 27.2 26.9 38.2 18.5 CY13E 25.5 20.2 25.5 21.5 19.2 22.5 26.5 23.7 22.0 30.8 15.4 EV/Sales (x) CY12E 3.1 1.1 4.8 3.2 3.0 3.4 3.6 6.4 2.5 5.0 0.9 CY13E 2.6 1.0 4.2 2.8 2.5 2.8 3.0 5.5 2.1 4.1 0.8 RoE (%) CY12E 36.9 45.2 129.4 39.3 31.2 34.0 82.7 34.8 30.0 73.0 8.9 CY13E 34.7 44.1 120.1 42.0 38.4 32.8 76.2 33.1 28.8 61.6 10.2 CAGR # Sales 16.1 17.0 14.3 13.4 20.1 16.8 16.1 16.8 16.5 18.6

Source: Company, Angel Research; Note: #Denotes CAGR for FY2012-14E;*December year ending

May 11, 2012

GSK Consumer | 1QCY2012 Result Update

Profit & Loss Statement

Y/E Dec (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Total Expenditure Cost of Materials Advertising Exp Personnel Others EBITDA % chg (% of Net Sales) Depreciation & Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Prior Period & Extra. Exp./(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg CY08 1,700 159 1,542 1,542 20.6 1,304 586 194 172 352 238 5.7 15.4 42 196 7.9 12.7 5 95 33.4 286 16.6 1.63 284 96 33.5 188 188 190 16.8 12.3 45.2 45.2 28.2 CY09 2,025 104 1,922 1,922 24.6 1,611 714 302 201 394 311 30.8 16.2 42 269 37.3 14.0 4 89 25.2 354 23.9 (2.61) 356 124 35.0 233 233 230 21.2 12.0 54.7 54.7 16.8 CY10 2,431 125 2,306 2,306 20.0 1,818 865 371 230 352 489 57.3 21.2 40 449 67.1 19.5 3 0.0 446 26.1 (0.29) 447 152 34.1 294 294 294 27.7 12.7 71.2 71.2 21.2 CY11 2,832 147 2,686 2,686 16.5 2,261 1,023 437 258 542 425 (13.0) 15.8 46 379 (15.6) 14.1 3 165 30.5 540 21.1 6.65 534 178 33.0 355 355 362 23.1 13.5 86.0 86.0 30.2 CY12E 3,328 204 3,124 3,124 16.3 2,589 1,199 447 303 640 535 72.1 17.1 52 483 27.4 15.5 4 172 26.5 651 20.5 651 218 33.5 433 433 433 19.6 13.9 102.9 102.9 16.1 CY13E 3,903 240 3,663 3,663 36.4 3,019 1,400 513 355 751 644 51.6 17.6 60 584 54.2 16.0 4 199 25.5 2.00 779 44.3 779 261 33.5 518 518 518 43.2 14.1 123.2 123.2 18.9

May 11, 2012

GSK Consumer | 1QCY2012 Result Update

Balance Sheet
Y/E Dec (` cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Misc Exp Total Assets 473 329 144 16 66 853 471 62 320 312 541 767 492 364 128 38 66 1,173 820 56 297 511 662 894 533 397 136 108 66 1,423 976 84 363 800 623 933 570 436 134 171 66 1,670 1,080 121 469 938 733 1,104 893 488 405 116 66 1,669 1,046 119 505 891 778 1,365 1,032 548 484 134 66 1,999 1,281 139 579 973 1,026 1,711 42 719 761 7 767 42 863 905 (11) 894 42 918 960 (27) 933 42 1,102 1,144 (40) 1,104 42 1,363 1,405 (40) 1,365 42 1,709 1,751 (40) 1,711 CY08 CY09 CY10 CY11 CY12E CY13E

Cash Flow Statement

Y/E Dec (` cr) Profit before tax Depreciation Change in Working Capital Interest/ Dividend(Net) Direct taxes paid Others Cash Flow from Operations Inc./ (Dec.) in Fixed Assets Inc./ (Dec.) in Investments Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Interest / Dividend (Net) Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances

CY08 286 42 (58) (31) 96 (10) 133 29 298 269 31 (7) (24) 377 94 471

CY09 354 42 211 (20) 124 (5) 458 41 (41) 89 (20) (68) 349 471 820

CY10 452 40 169 (41) 152 4 472 111 (111) (0.00) 245 (41) (204) 156 820 976

CY11 540 46 (39) (67) 178 6 308 100 (100) 171 (67) (104) 104 976 1,080

CY12E 651 52 (44) (59) 218 (35) 347 267 (267) 172 (59) (113) (34) 1,080 1,046

CY13E 779 60 (9) (67) 261 (4) 498 158 (158) 172 (67) (105) 235 1,046 1,281

May 11, 2012

GSK Consumer | 1QCY2012 Result Update

Key Ratios
Y/E Dec Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Returns (%) RoCE Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover Inventory / Sales (days) Receivables (days) Payables (days) Net working capital (days) 3.3 66 10 59 17 4.3 51 6 71 (30) 3.9 49 8 74 (56) 4.7 50 13 91 (47) 3.5 49 10 73 (31) 3.6 49 9 70 (25) 27.3 45.7 27.0 32.3 94.2 27.9 36.9 1,418.7 32.2 37.2 33.8 39.1 186.7 34.0 38.0 103.7 32.8 45.2 45.2 55.1 15.0 180.9 54.7 54.7 65.3 18.0 215.2 71.2 71.2 80.7 50.0 228.3 86.0 86.0 95.4 35.0 272.1 102.9 102.9 115.3 35.0 334.1 123.2 123.2 137.5 35.0 416.4 61.4 50.3 15.3 0.5 7.3 47.1 14.6 50.7 42.4 12.9 0.6 5.6 34.9 12.1 38.9 34.3 12.1 1.8 4.6 28.4 11.4 32.2 29.1 10.2 1.3 3.9 24.9 9.6 26.9 24.1 8.3 1.3 3.4 19.9 7.8 22.5 20.2 6.7 1.3 2.8 16.1 6.1 CY08 CY09 CY10 CY11 CY12E CY13E

May 11, 2012

GSK Consumer | 1QCY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

GSK Consumer No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

May 11, 2012