No cheer on demand front for GSK Consumer

Weak volumes and rich valuations to cap upsides

GlaxoSmithKline Consumer’s December quarter results indicate that demand pressure is far from over for the company. Its sales in the quarter ended December grew only 1.7 per cent year-on-year (y-o-y) to Rs 1,029 crore, though it was a tad ahead of the Bloomberg consensus estimate of Rs 1,019 crore.

In a call with investors on Tuesday, the company indicated volumes were flat in the quarter. But for the Chennai floods, its volumes would have grown at one per cent – in sync with that of the health food drink (HFD) category. Nevertheless, even at one per cent, its far from exciting and points to the weakness in consumer demand. It also means sales growth was fully driven by realisations, which were undertaken in July 2015 and January 2016.

“Revenues continue to be impacted by weak consumer sentiments on one hand and phase-out of fiscal benefits on the other (about five percentage points impact, adjusting for which sales growth would have been six-seven per cent),” says Richard Liu of JM Financial. Slowdown in sales of over the counter (OTC) products such as Eno, Crocin, Iodex, among others, which grew only nine per cent to Rs 41 crore is another concern. Though growth, excluding one-offs, is at 12 per cent, this business grew 27 per cent in the first half of the current financial year. Addition of Otrivin and Voltaren though could provide some boost to this segment.

Savings in input costs, other expenses and ad spends aided the earnings before interest, tax, depreciation and amortisation (Ebitda) margin. Part of the gains were offset by higher employee costs. Ebitda margin expanded 506 basis points y-o-y to 15.5 per cent. Consequently, GSK Consumer’s net profit grew 36.8 per cent to Rs 132 crore, higher than the Bloomberg consensus estimate of Rs 113 crore. Since there is a limit to how much a company can continue to save on costs and thereby drive profits, it is volumes that are more critical.

The company’s volume growth could get a leg up from a favourable base. This is because its volumes grew between zero and two per cent since the March 2015 quarter. While management is witnessing marginal uptick in demand trends, this is yet to reflect in its numbers. The company though has managed to gain market share and kept its leadership position intact with both Horlicks and Boost witnessing healthy traction. The company is best placed to benefit from rising health food drinks demand from rural/semi-rural areas (due to higher income from direct benefits transfer, Seventh Pay Commission award, etc), as it expands its reach. Intense competition from peers such as Abbott and Complan though are key monitorables. Management believes input cost inflation will move up in 2016. While this will exert some pressure on margins, the company has identified target areas for driving cost efficiencies.

GSK Consumer stock currently trades at 31 times the financial year 2017 estimated earnings, much above its historical average one-year forward price to earnings ratio of about 22 times. Not surprisingly, analysts see limited upsides with target prices on an average being only eight per cent higher from current levels.