8 November 2017
2QFY18 Results Update | Sector: Consumer
GSK Consumer
Upgrade to Neutral
BSE SENSEX
33,219
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm/ Vol m
Free float (%)
S&P CNX
10,303
SKB IN
42.1
237.5 / 3.7
5800 / 4650
8/-2/-22
112
27.5
CMP: INR5,467 TP: INR5,400 (-1%)
Market share continues to decline, schemes impact gross margins
GSK Consumer (SKB) posted 3.2% YoY sales growth
(including operating
income) to INR11.2b. EBITDA grew 6.6% YoY to INR2.6b (our estimate:
INR2.3b), while adjusted PAT grew 4.7% YoY to INR1.9b (our estimate:
INR1.75b). Like-to-like GST-adjusted sales grew 4.8% YoY. Like-to-like domestic
sales grew 6% YoY while exports declined 26% YoY. Domestic volumes grew
2.5% YoY (on base of 3% decline in 2QFY17) and price increase was around 4%
(taken in 1QFY18; SKB has not taken price increase since then).
Gross margin shrank 130bp YoY to 64.7%
.
High raw material costs along with
higher ad spend (up 50bp YoY to 12.3%) were set off by decrease in other
expenditure (down 210bp YoY to 17.3%) and lower staff costs (down 50bp YoY
to 13.6%). EBITDA margin expanded 70bp YoY to 23.4% in 2QFY18.
Concall highlights:
(1)
Management is working towards attaining double-digit
revenue growth.
(2)
Market share decline has been arrested sequentially, but
YoY as well as over March 2017, share decline continues.
Valuation and view:
SKB remains an inferior business relative to peers, with
category growth showing no signs of recovery to earlier levels. There are also
no indications of market share recovery. Volume growth remains moribund,
despite a weak base quarter after quarter for three years now. With a lower
proportion of rural sales compared to peers, the company does not have any
major tailwind going forward on volumes and earnings. EBITDA and PAT CAGR
of 13-14% over FY18-20E will be significantly inferior to peers and so will RoE of
~22%. We continue to value the core business at ~25% discount to the non-
alcoholic consumer peer valuations of 39.2x (which amounts to 30x) and add
cash per share, as cash earnings to PBT is over 20%. The stock has been a
significant underperformer, with flattish return over the past three years.
However, with the sector re-rating, of late, average consumer peer valuations
have gone up in the last few months, limiting downside. We therefore upgrade
from Sell to Neutral with a target price of INR5,400 (on September 2019E EPS).
(INR Million)
FY17
FY18
3Q
-17.0
8,604
-11.5
6,927
1,677
19.5
-9.5
171
6
559
2,059
695
33.8
1,364
-8.3
4Q
-1.0
11,019
2.3
8,848
2,171
19.7
1.5
177
9
710
2,695
936
34.7
1,759
8.4
1Q
0.0
9,853
4.4
8,190
1,664
16.9
-18.3
170
5
557
2,045
723
35.3
1,322
-17.7
2Q
2.5
11,153
3.2
8,540
2,614
23.4
6.6
177
6
550
2,981
1,057
35.5
1,924
4.7
3QE
12.0
9,894
15.0
7,867
2,027
20.5
20.9
172
7
531
2,379
833
35.0
1,547
13.4
FY17
FY18E
FY18
2QE
6.0
10,965
1.5
8,641
2,324
21.2
-5.2
170
7
549
2,697
944
35.0
1,753
-4.6
Var.
(%)
1.7%
Financials & Valuations (INR b)
Y/E Dec
2017 2018E 2019E
39.9
42.8
48.1
Net Sales
8.3
8.8
10.1
EBITDA
6.6
6.8
7.7
PAT
156.1 160.8 182.3
EPS (INR)
0.9
3.0
13.4
Gr. (%)
742.4 759.2 856.2
BV/Sh (INR)
22.2
21.4
22.6
RoE (%)
22.2
21.5
22.6
RoCE (%)
35.0
34.0
30.0
P/E (x)
7.4
7.2
6.4
P/BV (x)
Estimate change
TP change
Rating change
Quarterly Performance
Y/E Mar
HFD Volume Growth (%)
Net Sales
YoY Cha nge (%)
Tota l Exp
EBITDA
Ma rgi ns (%)
YoY Cha nge (%)
Depreci a ti on
Interes t
Other Income
PBT
Ta x
Ra te (%)
Adj PAT
YoY Cha nge (%)
E: MOSL Estimates
1Q
-6.0
9,439
-5.2
7,404
2,035
21.6
-0.6
147
6
592
2,474
868
35.1
1,606
2.9
2Q
-3.0
10,803
-1.1
8,351
2,452
22.7
3.0
148
6
578
2,876
1,039
36.1
1,837
-0.1
4QE
5.0
-6.8
4.5
11,900 39,864 42,801
8.0
-3.6
7.4
9,431 31,530 34,028
2,468 8,335 8,773
20.7
20.9
20.5
13.7
-1.0
5.3
167
642
686
10
28
28
702 2,439 2,340
2,994 10,104 10,399
1,024 3,537 3,636
34.2
35.0
35.0
1,970 6,566 6,763
12.0
-4.5
3.0
12.5%
10.5%
9.8%
Krishnan Sambamoorthy
– Research Analyst
(Krishnan.sambamoorthy@motilaloswal.com ); +91 22 3982 5428
Vishal Punmiya
– Research Analyst
(Vishal.Punmiya@motilaloswal.com); +91 22 3980 4261
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

GSK Consumer
Exhibit 1: HFD volumes grew by ~2.5% YoY in 2QFY18 on a
base of 3% decline
10 11
HFD volume growth (%)
8
3
2
5
23 23
2
2
0
0
0
(3)
(1)
0
3
15
8 10
Exhibit 2: Reported net sales grew by 3% YoY
Net Sales (INR b)
17
9
3
(2) (4)
(5)
(1)
(11)
2
4
3
Sales growth (%)
(6)
(11)
(17)
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: Gross margin contracted 130bp YoY
Gross Margin (%)
Exhibit 4: ..while EBITDA margin expanded 70bp YoY
EBITDA Margin (%)
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Quarterly cost changes
Staff Costs (%)
26.1
26.1
Advertising Spend (%)
Other Exp (%)
20.2
16.6 21.0 20.5
19.3 23.5 19.4 24.3 20.4 22.9 19.4 25.2 21.0 21.8
17.3
14.4 12.9 11.8 10.7
16.1 19.0 16.6 14.6 15.7 21.5 15.0 11.8 13.4 12.9
15.7 13.0 12.3
9.2
9.5
9.0 10.9 9.1
8.4 11.5 12.0 11.2 12.5 13.3 13.4 12.1 12.4 9.4 13.6 11.6
Source: Company, MOSL
8 November 2017
2

GSK Consumer
Exhibit 6: Region-wise Split for 2QFY17
West Exports
6%
3%
North
7%
South
44%
East
39%
Source: Company, MOSL
East
37%
Exhibit 7: Region-wise Split for 2QFY18
West Exports
5%
North 3%
6%
South
48%
Source: Company, MOSL
Conference call highlights
Business environment
Like-to-like sales adjusted for GST grew 4.8% YoY. Like-to-like domestic sales
were up 6% YoY while exports declined 26% YoY. Domestic volume growth was
2.5% in 2QFY18 (on the base of 3% decline in 2QFY17) and price increase was
around 4%. Price increase was taken in 1QFY18; no price increase since then.
Market share decline has been arrested sequentially, but YoY share decline and
decline over March 2017 continues.
Category growth was around 5% compared to 4.8% growth in HFD for SKB.
Exports were flattish in 1HFY18.
Sachet volumes are growing in double digits. Anecdotally, 20% of users upgrade
to larger packs. Sachets constitute 8% of sales and have lower gross margins
compared to large packs.
On CSD, SKB achieved 70% of pre-GST run rate in 2QFY18.
Changed ad agency from JWT to FCB to improve communication.
230m people consume HFD already. Trying to increase amount of purchases per
household as well. Demand goes up during exams and during monsoon; so, not
all 230m customers consume HFD products throughout the year. 20% of
customers consume 60% of volumes, SKB believes.
Material costs and price increases
For 2QFY18, SMP costs were up YoY. SKB sees some softening on SMP prices,
going forward.
Maintains that price increase will be in line with CPI inflation, something that
SKB has been stating for a few quarters now.
Price increases are now 1x CPI; were 1.5x CPI in earlier years.
New opportunities including Growth Plus
In September 2016, SKB had launched Growth Plus (competing with Pedia Sure),
which has been rolled out in five states with advertising support as well now.
Growth Plus is getting increasing share of recommendations from doctors. Will
decide on when to take it national; Abbot took 10 years to scale up Pedia Sure.
Growth Plus still in formative years. Takes time from doctor recommendation to
share gain. Shift happens very slowly, as mothers go through the whole course
of consumption. In states where SKB has launched Growth Plus, it has 25-30%
8 November 2017
3

GSK Consumer
share in this sub-segment but single-digit share in the segment. Management
believes Growth Plus is a superior product to Pedia Sure and works without
adding weight. Price parity with competition instead of 10% premium.
HFD extensions? Is SKB looking at RTD and flavored milk?
Will participate when
it has the products and packaging in place in these categories.
New categories?
Focus will be on HFD. Has Biscuits, foodles and oats already as
newer categories. To look at right-to-win and science-based strength in new
areas.
Business auxiliary commission
Business auxiliary income was flat. Pharma channel has taken time to recover
from GST implementation glitches. Focus was more on getting supply of
essential drugs in order rather than OTC, and hence, business auxiliary
commission growth was affected. This channel has recovered in October.
Sensodyne has seen a small increase in share in sensitivity oral care. See a
challenge for further growth in this segment in the near term. More focus will
be on even better communication of benefits rather than a herbal move.
Financials and guidance
Other expenses decline was due to lower royalty YoY, CSR phasing, one-off in
other expenses line (INR100m in 2QFY18).
Earlier indirect tax incidence was slightly lower than current 28% GST rate.
Management is working towards attaining double-digit revenue growth.
Valuation and view
SKB remains an inferior business relative to peers, with category growth
showing no signs of recovery to earlier levels. There are also no indications of
market share recovery. Volume growth remains moribund, despite a weak base
quarter after quarter for three years now. With a lower proportion of rural sales
compared to peers, the company does not have any major tailwind going
forward on volumes and earnings. EBITDA and PAT CAGR of 13-14% over FY18-
20E will be significantly inferior to peers and so will RoE of ~22%.
We continue to value the core business at ~25% discount to the non-alcoholic
consumer peer valuations of 39.2x (which amounts to 30x) and add cash per
share, as cash earnings to PBT is over 20%. The stock has been a significant
underperformer, with flattish return over the past three years. However, with
the sector re-rating, of late, average consumer peer valuations have gone up in
the last few months, limiting downside. We therefore upgrade from Sell to
Neutral with a target price of INR5,400 (on September 2019E EPS).
Exhibit 8: There is marginal change in EPS
2018E
44,338
8,660
6,650
Old
2019E
48,821
9,740
7,659
2020E
54,220
11,110
8,477
2018E
42,801
8,773
6,763
New
2019E
48,144
10,114
7,668
2020E
53,479
11,473
8,684
2018E
(3.5)
1.3
1.7
(%) Change
2019E
(1.4)
3.8
0.1
2020E
(1.4)
3.3
2.4
Sales
EBITDA
PAT
Source: Company, MOSL
8 November 2017
4

GSK Consumer
Exhibit 9: GSK consumer P/E (x)
47.0
37.0
27.0
17.0
7.0
P/E (x)
Min (x)
35.8
27.2
18.5
9.7
29.5
Avg (x)
+1SD
41.1
Max (x)
-1SD
Exhibit 10: Consumer sector P/E (x)
45.0
37.0
29.0
21.0
13.0
P/E (x)
Min (x)
Avg (x)
+1SD
37.0
30.1
23.2
17.1
39.7
Max (x)
-1SD
41.3
Source: Company, MOSL
Source: Company, MOSL
Exhibit 11: Valuation Matrix
Reco
Company
(INR)
Consumer
Asian Paints
Britannia Inds.
Colgate-Palm.
Dabur India
Emami
Godrej Cons.
GlaxoSmith C H L
Hind. Unilever
ITC
Jyothy Lab.
Marico
Nestle India
P & G Hygiene
Page Industries
Parag Milk
Pidilite Inds.
United Breweries
United Spirits
Retail
Jubilant Food.
Titan Company
Neutral
Buy
Buy
Buy
Buy
Neutral
Neutral
Buy
Neutral
Neutral
Neutral
Neutral
Neutral
Buy
Neutral
Neutral
Buy
Neutral
Sell
Buy
1,142
4,652
1,035
340
1,245
979
5,467
1,235
266
336
CMP
Target
Price
(INR)
1,280
5,165
1,328
395
1,435
1,015
5,400
1,440
280
365
Mkt Cap
Upside
(INR B) (USD B)
(%)
12
11
28
16
15
4
-1
17
5
9
10
-20
4
3
7
14
-15
-3
-21
13
1,096
558
281
598
282
667
230
2,672
3,227
61
400
742
287
230
22
388
304
445
105
669
16.9
8.6
4.3
9.2
4.3
10.3
3.5
41.1
49.6
0.9
6.1
11.4
4.4
3.5
0.3
6.0
4.7
6.8
1.6
10.3
EPS Growth YoY (%)
FY17
8.7
7.3
-5.7
1.9
4.5
12.4
0.9
1.9
9.4
175.7
12.1
-1.6
2.3
15.0
-46.4
6.7
-23.0
87.1
-32.1
18.5
FY18E
2.6
15.8
10.2
6.8
0.2
11.9
3.0
16.2
8.5
-18.3
3.5
-2.5
14.0
23.4
147.7
7.9
13.9
30.6
114.2
38.5
FY19E FY17
19.8
22.6
22.1
20.0
25.0
15.8
13.4
21.0
10.2
18.9
21.8
16.1
16.1
35.2
38.7
14.0
41.5
53.8
28.0
27.0
54.3
63.1
48.7
46.8
46.9
51.8
35.0
62.9
31.6
29.9
49.3
65.2
66.4
86.2
71.2
45.3
132.2
114.5
159.9
83.4
P/E (x)
FY18E
53.0
54.5
44.2
43.9
46.8
46.3
34.0
54.1
29.2
36.6
47.7
66.9
58.3
69.9
28.7
42.0
116.1
87.6
74.6
60.2
FY19E
44.2
44.5
36.2
36.6
37.5
40.0
30.0
44.7
26.5
30.8
39.1
57.6
50.2
51.7
20.7
36.8
82.0
57.0
58.3
47.4
RoE
(%)
FY17
28.5
36.9
50.4
28.4
35.8
24.6
22.2
66.5
23.5
21.1
36.7
39.0
39.3
40.0
6.0
28.2
10.2
21.3
8.2
20.6
Div.
(%)
FY17
0.8
0.0
1.0
0.7
0.7
0.6
1.0
1.3
2.1
1.8
1.0
0.8
3.7
0.4
0.0
0.6
0.1
0.0
0.2
0.5
310
340
7,695 6,160
8,831 9,200
20,590 21,310
257
275
758
865
1,148
980
3,060 2,970
1,600
753
1,270
850
Source: Company, MOSL
8 November 2017
5

GSK Consumer
Financials and valuations
Income Statement
Y/E December
Net Sales
Change (%)
Total Expenditure
EBITDA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Charges
Other Income
Profit before Taxes
Change (%)
Margin (%)
Tax
Deferred Tax
Tax Rate (%)
Profit after Taxes
Change (%)
Margin (%)
Non-rec. (Exp)/Income
Reported PAT
2015
43,550
-11.2
-35,775
7,775
-14.2
17.9
621
7
1,745
8,891
-12.5
20.4
3,169
-114
34.4
5,836
-13.5
13.4
0
5,836
2016
41,364
-5.0
-32,944
8,420
8.3
20.4
613
23
2,215
9,999
12.5
24.2
3,491
0
34.9
6,508
11.5
15.7
0
6,508
2017
39,864
-3.6
-31,530
8,335
-1.0
20.9
642
28
2,439
10,104
1.0
25.3
3,537
0
35.0
6,566
0.9
16.5
0
6,566
2018E
42,801
7.4
-34,028
8,773
5.3
20.5
686
28
2,340
10,399
2.9
24.3
3,910
-274
35.0
6,763
3.0
15.8
0
6,763
2019E
48,144
12.5
-38,030
10,114
15.3
21.0
770
28
2,475
11,791
13.4
24.5
4,433
-310
35.0
7,668
13.4
15.9
0
7,668
(INR Million)
2020E
53,479
11.1
-42,005
11,473
13.4
21.5
882
28
2,790
13,353
13.2
25.0
5,021
-351
35.0
8,684
13.2
16.2
0
8,684
Balance Sheet
Y/E December
Share Capital
Reserves
Net Worth
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Deferred Assets
Curr. Assets, L&A
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2015
421
20,710
21,130
21,130
10,593
-5,675
4,917
423
1,043
33,812
4,663
3,134
22,965
3,050
19,065
10,354
5,473
3,239
14,746
21,130
2016
421
27,567
27,987
27,987
10,995
-6,135
4,860
514
1,131
42,014
4,616
3,542
27,123
6,733
20,532
10,765
5,541
4,227
21,482
27,987
2017
421
30,806
31,227
31,227
11,713
-6,754
4,959
492
1,278
45,758
4,611
3,210
30,874
7,063
21,342
11,927
5,319
4,095
24,416
31,227
2018E
421
31,511
31,932
31,932
13,377
-7,440
5,937
492
1,278
46,219
4,104
3,852
30,287
7,976
22,076
11,544
5,919
4,612
24,143
31,932
2019E
421
35,591
36,011
36,011
15,377
-8,210
7,167
492
1,278
51,757
6,067
3,948
32,965
8,777
24,765
12,945
6,590
5,230
26,992
36,011
(INR Million)
2020E
421
40,210
40,631
40,631
17,377
-9,093
8,285
492
1,278
59,049
6,593
4,278
38,646
9,531
28,555
15,293
7,339
5,923
30,494
40,630
8 November 2017
6

GSK Consumer
Financials and valuations
Ratios
Y/E December
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2015
138.8
153.5
502.4
45.0
32.4
2016
154.7
178.0
665.5
55.0
33.7
2017
156.1
171.4
742.4
54.6
35.0
2018E
160.8
177.1
759.2
64.3
40.0
2019E
182.3
200.6
856.2
72.9
40.0
2020E
206.5
227.4
966.0
82.6
40.0
39.4
35.6
4.8
26.6
10.9
0.8
35.3
30.7
4.9
24.1
8.2
1.0
35.0
31.9
5.0
23.9
7.4
1.0
34.0
30.9
4.7
22.8
7.2
1.2
30.0
27.3
4.1
19.5
6.4
1.3
26.5
24.0
3.6
16.7
5.7
1.5
29.7
29.8
26
2.1
26.5
26.6
31
1.5
22.2
22.2
29
1.3
21.4
21.5
33
1.3
22.6
22.6
30
1.3
22.7
22.7
29
1.3
0.0
0.0
0.0
0.0
0.0
0.0
Cash Flow Statement
Y/E December
PBT
Int./Div. Received
Depreciation and Amort.
Interest Paid
Direct Taxes Paid
(Incr)/Decr in WC
CF from Operations
(Incr)/Decr in FA
Free Cash Flow
(Pur)/Sale of Invt.
CF from Invest.
Issue of Shares
(Incr)/Decr in Debt
Dividend Paid
Deffered Tax Liability
Others
CF from Fin. Activity
Incr/Decr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
2015
8,891
-1,745
621
7
-3,169
3,273
7,878
-2,085
5,793
0
-2,085
0
0
-1,892
16
661
-1,215
4,577
18,388
22,965
2016
9,999
-2,215
613
23
-3,491
-2,578
2,351
-493
1,858
0
-493
0
0
-2,313
1
4,611
2,299
4,157
22,965
27,122
2017
10,104
-2,439
642
28
-3,537
817
5,614
-697
4,917
0
-697
0
0
-2,298
1
1,131
-1,166
3,751
27,123
30,874
2018E
10,399
-2,340
686
28
-3,910
-314
4,549
-1,664
2,885
0
-1,664
0
0
-2,705
1
-768
-3,472
-587
30,874
30,287
2019E
11,791
-2,475
770
28
-4,433
-172
5,509
-2,000
3,509
0
-2,000
0
0
-3,067
1
2,235
-831
2,678
30,287
32,965
(INR Million)
2020E
13,353
-2,790
882
28
-5,021
2,180
8,633
-2,000
6,633
0
-2,000
0
0
-3,473
1
2,521
-951
5,681
32,965
38,646
8 November 2017
7

GSK Consumer
Corporate profile
Company description
Exhibit 1: Sensex rebased
GSK Consumer is the largest player in the INR8b
Indian health drink market, with a 70% market
share. In the early years, Horlicks was being
imported, bottled and sold in India. GSK has re-
launched Mother’s Horlicks, Horlicks Life and
Chocolate Horlicks in 1Q and has restaged the base
variant in 2QFY15.
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Sep-17
Promoter
DII
FII
Others
72.5
8.9
4.0
14.7
Jun-17
72.5
8.6
4.2
14.8
Sep-16
72.5
4.7
8.3
14.6
Source: Capitaline
Exhibit 3: Top holders
Holder Name
ICICI PRUDENTIAL VALUE FUND - SERIES
LICI NEW ENDOWMENT PLUS - BALANCED
FUND
NA
NA
NA
% Holding
3.3
2.7
0.0
0.0
0.0
Source: Capitaline
Note: FII Includes depository receipts
Exhibit 4: Top management
Name
Subodh Bhargava
Manoj Kumar
Zubair Ahmed
Vivek Anand
Sonali Khanna
Designation
Chairman
Managing Director
managing director
Whole Time Director &
CFO
Company Secretary
Exhibit 5: Directors
Name
Jonathan Box
Mukesh H Butani
P Dwarakanth
Jaiboy J Phillips
Name
Kunal Kashyap
Naresh Dayal
Sangeeta Talwar
R Subramanian
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
Price Waterhouse
Type
Statutory
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY18
FY19
FY20
MOSL
forecast
160.8
182.3
206.5
Consensus
forecast
167.5
191.3
211.1
Variation (%)
-4.0
-4.7
-2.2
Source: Bloomberg
Source: Capitaline
8 November 2017
8

GSK Consumer
NOTES
8 November 2017
9

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GSK Consumer
Disclosure of Interest Statement
Analyst ownership of the stock
GSK Consumer
No
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8 November 2017
10