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Steady on volume, higher on profits — maintain ADD
GSKCH’s 4QFY19 revenues came in at 12.9bn, up 9% yoy and in line with EE. Overall HFD volumes were up 6% yoy with volume/value market share at 63.8%/53.8% as of Mar’19. EBITDAM expanded 356bps yoy to 24.8% led by improving gross margins and lower other expenses, translating into higher EBIDTA growth for the quarter. We broadly maintain our FY20/FY21 volume growth estimates and marginally raise EBIDTA estimates. While the business seems to be on a sound footing, we feel that stock movement would be linked to Hindustan Unilever’s stock price, given the impending merger. Maintain ADD with a Mar’20 TP of Rs 7,576 (Mar’20 TP: Rs 7,799) set at a 32x TTM EPS of Rs 237.
Topline matches estimates, but EBIDTA higher than expectations:
4Q revenues grew 9% yoy while overall volumes were up by a healthy 6.5% yoy off a decent base (4QFY18: +8% yoy). Overall HFD volume growth at 6% yoy was broad-based across brands and channels. For FY19, exports grew 24% led by 21% volume growth; majority of growth in exports was driven by GSK Malaysia. Foods portfolio for FY19 declined 5% during FY19. Other income included one-time income of Rs 440mn. A&P spends at Rs 1.91bn increased 13% yoy. EBITDA was at Rs 3.18bn, up 27% yoy and 13% above EE. GSKCH has lost value market share in HFD over the years but aims to address the issue through its high science portfolio with brands like Protein+ and Growth+.
Gross margins marginally down qoq ; price hikes to help counter RM inflation:
We believe the company is unlikely to sustain current levels of gross margins as inflation starts setting in for some key raw materials (like milk and barley). The company has taken ~3% price hikes for some SKUs, and the same is said to be below inflation levels currently. GSKCH plans to take further price hikes to counter inflation and has forward covers on certain products, which should together help in maintaining profitable growth. We expect FY20E EBIDTA growth to be in low double-digits as gross margins are likely to peak out; employee costs, which increased by 22% yoy during FY19, are should ease going into FY20 and help protect EBDITAM.
We feel that any upside in GSKCH would likely be linked to the HUVR stock price as the impending merger is likely to be completed by Mar’20. Reiterate ADD with a Mar’20 TP of Rs 7,576 set at 32x TTM EPS of Rs 237.
Below-expected volume growth, higher competitive intensity and continued increase in RM costs.
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