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GSK Consumer valuation unsustainable

Sheetal Agarwal / Mumbai 19 May 16 | 06:21 AM

Continued slowdown in rural markets, coupled with phasing out of fiscal benefits, at its Baddi plant in Himachal Pradesh hurt GlaxoSmithKline Consumer Healthcare (GSK Consumer)’s volumes in the quarter ended March.

While the company hasn't shared volume details, analysts estimate it to have declined about six per cent. Volumes were flat in the preceding two quarters. The dip indicates further slowdown in the health food drink (HFD) category. This is also reflected in the company’s reported sales declining 8.8 per cent year-on-year (y-o-y) to Rs 1,109 crore, below the Bloomberg consensus estimate of Rs 1,262 crore.

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Abneesh Roy of Edelweiss Securities believes the decline is because of wholesale destocking in India. Details on this will come out in the management call on May 19.

Slowdown in sales of over the counter products such as Eno, Crocin and Iodex, which grew only 10.4 per cent to Rs 56 crore, is another concern.

Weak topline along with higher investments in advertising more than offset savings in input and employee costs. Advertising spends increased 222 basis points to 17.2 per cent of sales for the quarter. Consequently, Ebitda (earnings before interest, taxes, depreciation and amortisation) margins fell 57 basis points y-o-y to 21.1 per cent. Amidst intensifying competition from existing players Mondelez India, Abbott, Complan and new entrant Patanjali, GSK Consumer’s strategy of reinvesting all savings in advertising makes sense.

As a result, GSK Consumer increased its market share in the HFD category by 0.9 per cent (in value terms) over the past twelve months. While Horlicks and its extensions continued to garner market share, Boost lost 20-30 basis points value market share.

At the net level, adjusted profit fell 8.2 per cent y-o-y to Rs 181 crore and missed Bloomberg estimates by 22 per cent.

While financial year 2016-17 offers hope of a good monsoon, higher pay to government employees and gains from direct benefits transfer scheme, GSK Consumer will have to continuously defend its market position. The company will have to invest in innovation and advertising. As tailwinds of benign input costs reduce gradually, its margins and earnings could also witness some pressure.

It is, thus, not surprising that GSK Consumer’s scrip fell 3.7 per cent on Wednesday, against a 0.27 per cent fall in the Sensex. Even after this fall, it trades at rich valuations of 32 times FY17 estimated earnings, which will be difficult to sustain in the wake of continued slowdown.

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