3QCY2012 Result Update | FMCG

November 5, 2012

GSK Consumer
Performance Highlights
Quarterly Result
(` cr) Revenue EBITDA OPM (%) PAT 3QCY12 828 140 17.0 129 3QCY11 720 118 16.4 103 % yoy 14.9 19.1 59 24.8 2QCY12 730 111 15.2 107 % qoq 13.4 26.9 181 20.6

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code FMCG 12,852 (1,080) 0.2 3200/2179 6,252 10 18,763 5,704 GLSM.BO SKB@IN

`3,056 -

Source: Company, Angel Research

For 3QCY2012 Glaxosmithkline Consumer Healthcare Ltd (GSK Consumer) posted an 13.4% yoy growth in its net sales, aided by a ~6% volume growth and 10% price growth in the domestic business. During the quarter, the overall sales growth was affected by 8% yoy decline in the sales to canteen stores division (CSD). Key highlights of the quarter: The companys major brands in the malted food drink (MFD) division - Horlicks and Boost posted a volume growth of 4.5% and 8.5% respectively. In value terms Horlicks and Boost grew by 16% yoy and 22% yoy respectively, while biscuits too posted a strong 29% yoy growth. Despite the increase in prices of raw materials such as wheat flour (up 13% yoy), malted barley (up 6% yoy), SMP (up 7% yoy) and sugar (up 20% yoy) gross margin rose by 39bp yoy, due to the higher prices charged by the company during the quarter. The OPM rose by 59bp yoy to 17% aided by higher gross margin and lower other expenses. The bottom-line rose by 24.8% yoy due to superior operating performance and higher business auxiliary income of `28cr (up 27% yoy) and higher interest income of `26cr (up 36.8% yoy). 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 current market price, the stock is trading at 23.2x CY2013E EPS of `131.7. We continue to remain Neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 43.2 17.4 14.7 24.7

Abs. (%) Sensex SKB

3m 9.1 12.0

1yr 6.8 22.3

3yr 16.8 129.8

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 42.9 13.4 32.2 36.9 5.2 31.5

CY2011 2,686 16.5 362 20.8 15.8 86.0 35.5 11.2 33.8 37.2 4.4 27.7

CY2012E 3,124 16.3 469 29.5 17.1 111.4 27.4 8.9 36.3 39.3 3.8 21.9

CY2013E 3,663 17.3 554 18.2 17.6 131.7 23.2 7.1 34.0 36.9 3.1 17.8 V Srinivasan
022-39357800 Ext: 6831 v.srinivasan@angelbroking.com

Please refer to important disclosures at the end of this report

GSK Consumer | 3QCY2012 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 & Ammortisation Other Income PBT (excl. Extraordinary Items) Extraordinary Income/(Expense) PBT (incl. Extraordinary Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Equity shares (cr) EPS (`)
Source: Company, Angel Research

3QCY12 828 310 37.5 78 9.4 139 16.7 161 19.4 687 140 17.0 0.3 8 58 190 190 23.0 62 32.4 129 15.5 4.2 30.6

3QCY11 720 273 37.9 66 9.2 120 16.6 143 19.9 602 118 16.4 1.0 12 48 153 153 21.2 50 32.6 103 14.3 4.2 24.5

% yoy 14.9 13.8 17.0 15.9 12.0 14.1 19.1 (73.8) (33.9) 21.3 24.4 24.4 23.6 24.8

2QCY12 730 270 37.0 79 10.8 116 15.9 154 21.0 619 111 15.2 0.8 9 57 159 159 21.7 52 32.8 107 14.6 4.2

% qoq 13.4 14.9 (2.0) 19.4 4.5 11.0 26.9 (67.5) (9.9) 1.0 20.0 20.0 18.9 20.6

9MCY2012 2,370 911 38.4 223 9.4 364 15.3 458 19.3 1,956 414 17.5 2.3 28 161 545 545 23.0 178 32.7 367 15.5 4.2

9MCY2011 2,083 809 38.8 197 9.4 323 15.5 392 18.8 1,720 363 17.4 2.6 34 116 443 443 21.3 147 33.2 296 14.2 4.2 70

% chg 13.8 12.7 13.2 12.6 17.0 13.7 14.1 (12.0) (16.9) 39.0 23.1 23.1 21.3 24.0

24.8

25.3

20.7

87

24.0

Exhibit 2: Actual vs Angel estimates

(` cr) Revenue EBITDA OPM (%) PAT
Source: Company, Angel Research

Actual 828 140 17.0 129

Angel Est 797 132 16.6 116

% chg 3.9 6.2 38 10.7

Healthy top-line growth despite de-growth in the CSD segment: GSK Consumer posted a healthy top-line growth of 14.9% yoy to `828cr (`720cr in 3QCY2011), led by ~6% volume growth and ~10% value growth in the domestic business. The healthy performance was despite an 8% de-growth in the sales to the CSD segment due to budget rationalization. The management indicated that the overall growth would have been higher by 150bp if CSD had grown at its normal growth rate. During 3QCY2012, the major brands in the MFD category - Horlicks and Boost posted a volume growth of 4.5% and 8.5% respectively. In value terms Horlicks and Boost grew by 16% yoy and 22% yoy respectively, while biscuits too posted a strong 29% yoy growth.
November 5, 2012

GSK Consumer | 3QCY2012 Result Update

Exhibit 3: Top-line growth at 14.9% yoy

900 800 700 600 (` cr) 500 400 300 200 613 508 710 653 720 602 813 730 100 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 828 20.0 (yoy %) (yoy %) 15.0 10.0 5.0 25.0

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

yoy growth (RHS)

Exhibit 4: Operational performance

25 20 15 5.0 10 5 20 15 16 10 11 7 7 7 6 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 5.0 5.0 7.0 8 10 8 8 8 12.0 10.0 8.0 6.0 4.0 2.0

(%)

Volume Growth(LHS) Source: Company, Angel Research

Value Growth (RHS)

OPM expands by 59bp yoy aided by higher realization: Despite the increase in prices of raw materials such as wheat flour (up 13% yoy), malted barley (up 6% yoy), SMP (up 7% yoy) and sugar (up 20% yoy), gross margin rose by 39bp yoy, due to the higher prices charged by the company during the quarter. OPM rose by 59bp yoy to 17% aided by higher gross margin and lower other expenses. Earnings growth aided by higher other income: The bottom-line for the quarter rose by 24.8% yoy due to superior operating performance and higher business auxiliary income of `28cr (up 27% yoy) and higher interest income of `26cr (up 36.8% yoy).

November 5, 2012

GSK Consumer | 3QCY2012 Result Update

Exhibit 5: Gross margin and OPM

70.0 60.0 50.0 62.8 64.9 61.9 59.4 62.1 64.4 59.4 63.0 62.5

Exhibit 6: PAT grows by 24.8% yoy

150 130 110 (`cr) 90 70 50 79 53 30 15.0 111 103 132 107 129 82 59 30.9 10.7 14.9 58.5 31.1 29.3 70.0 60.0 50.0 24.8 (yoy %) Oct-12 19.3 40.0 30.0 20.0 10.0 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Feb-12 3Q12 Apr-12 Jun-12

40.0 (%) 30.0 20.0 10.0 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 15.5 11.5 20.5 15.1 16.4 19.9 10.2 15.2 17.0

10

OPM

Gross margin

PAT (LHS)

yoy growth (RHS)

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 their 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 an 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 a double digit growth, aided by the companys effort to strengthen its distribution network. At the current market price, the stock is trading at 23.2x CY2013E EPS of `131.7. We continue to remain Neutral on the stock.

Exhibit 7: One-year forward P/E chart

40.0 35.0 30.0 25.0 (x) 20.0 15.0 10.0 5.0 Feb-09 Feb-10 Feb-11 Apr-09 Apr-10 Apr-11 Jun-09 Jun-10 Aug-09 Aug-10 Jun-11 Aug-11 Aug-12 Oct-08 Oct-09 Oct-10 Dec-08 Dec-09 Dec-10 Oct-11 Dec-11

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

November 5, 2012

GSK Consumer | 3QCY2012 Result Update

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 Neutral Neutral Neutral Neutral Mcap (` cr) 37,924 5,670 17,697 22,129 23,423 12,852 115,327 225,404 12,959 46,560 9,802 CMP (`) 3,954 475 1,301 127 688 3,056 534 288 211 4,829 159 TP (`) 584 Upside (%) 23 P/E (x) FY13E 32.0 22.9 35.8 28.4 31.5 27.4 36.2 30.9 31.1 42.1 24.0 FY14E 27.0 18.7 30.6 24.3 26.0 23.2 31.3 26.4 24.9 34.5 20.3 EV/Sales (x) FY13E 3.3 0.9 5.4 3.6 4.0 3.7 4.3 7.3 2.7 5.3 1.3 FY14E 2.7 0.7 4.8 3.1 3.3 3.1 3.8 6.2 2.2 4.5 1.1 RoE (%) FY13E 37.4 43.1 101.9 43.2 25.5 36.3 70.9 35.8 31.4 71.2 8.2 FY14E 35.3 41.9 98.5 41.4 25.4 34.0 59.8 35.3 29.7 60.3 9.5 CAGR # Sales 17.0 17.4 15.2 15.9 22.1 16.8 15.5 17.2 18.6 16.5 9.7 PAT 19.2 27.4 13.8 18.9 28.3 24.9 19.7 17.7 27.6 15.0 16.6

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

Company Background
GSK Consumer is one of the largest players in the health foods industry in India and a clear market leader in the hot malted beverages category. The company's flagship product - Horlicks is a highly popular brand with a rich heritage, ranking no. 1 in the malted beverages category with a ~50% market share. The company also sells other malted beverages brands, such as Boost, Maltova and Viva. The company is also present in the biscuits segment through its Horlicks biscuits range. In addition, the company promotes and distributes a number of OTC products from its global parent, which include prominent household names like Eno, Crocin and Iodex. GSK Consumer has a strong marketing and distribution network in India, comprising of over 1,800 wholesalers and 400,000 retail outlets.

November 5, 2012

GSK Consumer | 3QCY2012 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 16.8 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 21.2 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 30.2 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 20.8 CY12E 3,328 204 3,124 3,124 16.3 2,589 1,199 447 303 640 535 72.1 17.1 42 492 29.9 15.8 4 216 30.7 705 30.4 705 236 33.5 469 469 469 29.5 15.0 111.4 111.4 29.5 CY13E 3,903 240 3,663 3,663 36.4 3,019 1,400 513 355 751 644 51.6 17.6 57 588 55.0 16.0 4 249 29.9 2.00 833 54.2 833 279 33.5 554 554 554 53.1 15.1 131.7 131.7 53.1

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GSK Consumer | 3QCY2012 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 1,104 726 478 248 218 66 1,759 1,136 119 505 891 868 1,401 977 535 442 127 66 2,120 1,402 139 579 973 1,147 1,782 42 719 761 7 767 42 863 905 (11) 894 42 918 960 (27) 933 42 1,102 1,144 (40) 1,104 42 1,399 1,441 (40) 1,401 42 1,780 1,822 (40) 1,782 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 705 42 (42) (62) 236 (37) 369 203 (203) 172 (62) (110) 56 1,080 1,136

CY13E 833 57 (9) (70) 279 (4) 528 160 (160) 172 (70) (103) 266 1,136 1,402

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GSK Consumer | 3QCY2012 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) 4.3 49 10 73 (31) 3.8 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 39.3 226.1 36.3 36.9 121.0 34.0 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 35.0 272.1 111.4 111.4 121.5 35.0 342.5 131.7 131.7 145.2 35.0 433.3 67.7 55.4 16.9 0.5 8.0 52.1 16.1 55.8 46.8 14.2 0.6 6.3 38.7 13.5 42.9 37.8 13.4 1.6 5.2 31.5 12.7 35.5 32.0 11.2 1.1 4.4 27.7 10.7 27.4 25.2 8.9 1.1 3.8 21.9 8.4 23.2 21.0 7.1 1.1 3.1 17.8 6.4 CY08 CY09 CY10 CY11 CY12E CY13E

November 5, 2012

GSK Consumer | 3QCY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

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%)

November 5, 2012