Institutional Equities

3QFY15 Result Update Institutional Equities GlaxoSmithKline Consumer Healthcare Reuters: GLSM.BO; Bloomberg: SKB IN 4 February 2015 Price Hike Leads To Sales Growth Glaxo SmithKline Consumer Healthcare s (GSKCH) 3QFY15 net sales (including operating income) rose 16.5% YoY to Rs 10.12bn. This was ~6% above our and Bloomberg expectations. While volume growth was muted at 5%, price hike was around 11% YoY. Price hike led to better-than-expected gross margin, despite high milk prices. Going forward, we do not expect price hikes to be as high because of high competitive intensity and likely lower raw material costs. Despite the excise duty benefit likely to come off from FY16, we have assumed a healthy gross margin going forward. We have increased our EPS estimates for FY15/FY16/FY17 by 3.5%/2.4% and 4.3%, respectively, and yet EPS growth estimates are muted at 8.2%/14.3% for FY16/FY17. GSKCH trades at expensive multiples of 32.3xFY17E EPS. GSKCH is also expected to have a 24% contribution of non-operating income to PBT in FY15E (likely to remain high at 18% even in FY17), which does not deserve high multiple. We have rolled forward our target multiple to FY17E, and maintained it at 30x close to 3-year average, at a premium to 5-year/10 year average of 28.1x/21.4x, leading to 7% downside to our target price of Rs5,238 (Rs4,750 earlier). We retain Sell rating. Sales growth surprises: Sales growth was surprising after two previous quarters of singledigit YoY growth and was also healthy considering an 18% growth in the base quarter ended December 2013. The company reported a 1.2% market share gain in health food drinks (HFD) including a 50bps gain in Horlicks and a 30bps gain in Women s Horlicks. While oats business continues to remain very small, it grew 25% YoY in top-line and reported market share gain of 6.1%, the distinct second-largest player in this market. Gross margin healthy, A&P spending rises: EBITDA margin stood at 10.5% in 3QFY15, up 30bps YoY but down 700bps QoQ. December quarter is traditionally a weak quarter for margins. EBITDA margin was 10bps below our estimate, but 30bps above Bloomberg consensus estimate. Following better-than-expected sales growth, EBITDA grew 19.8% to Rs1.06bn. This was 4.6% above our estimate and 8.6% above Bloomberg consensus estimate. While EBITDA margin was below our estimate, gross margin was above our expectation because of price hike and a healthy 25% growth in other operating income. Gross margin actually increased by 180bps YoY compared to a declining trend YoY in the preceding quarters. Advertisement and promotion or A&P spending increased 32% YoY and 250bps on a percentage-to-sales basis (market activation for re-launch of Horlicks and Junior Horlicks) limiting EBITDA margin improvement to 30bps YoY. Other income was higher, but depreciation was lower than our expectations. PAT rose 20.9% YoY to Rs 964mn, 10.2% above our estimate and 1.2% above Bloomberg consensus estimate. SELL Sector: FMCG CMP: Rs5,648 Target Price: Rs5,238 Downside: 7% Krishnan Sambamoorthy krishnan.s@nirmalbang.com +91-22-3926 8033 Aditya Joshi aditya.joshi@nirmalbang.com +91-22-3926 8028 Key Data Current Shares O/S (mn) 42.1 Mkt Cap (Rsbn/US$bn) 237.5/3.8 52 Wk H / L (Rs) 5,999/4,011 Daily Vol. (3M NSE Avg.) 14,115 Price Performance (%) 1 M 6 M 1 Yr GSK Consumer (4.3) 16.3 32.8 Nifty Index 4.3 15.2 45.9 Source: Bloomberg Y/E March (Rsmn) 4QFY14 2QFY15 3QFY15 YoY (%) QoQ (%) 9MFY14 9MFY15 YoY (%) Net sales 8,690 11,136 10,125 16.5 (9.1) 27,734 30,921 11.5 Net raw material & purchases of finished goods 3,067 4,131 3,395 10.7 (17.8) 9,659 11,045 14.4 % of sales 35.3 37.1 33.5 (180 bps) 360 bps 34.8 35.7 90 bps Advtg. and sales promotion expenses 1,648 1,753 2,180 32.3 24.4 4,656 5,347 14.8 % of sales 19.0 15.7 21.5 260 bps (70 bps) 16.8 17.3 50 bps Staff costs 827 1,009 847 2.5 (16.0) 2,808 2,910 3.7 % of sales 9.5 9.1 8.4 (110bps) 580 bps 10.1 9.4 (70 bps) Other expenses 2,264 2,286 2,644 16.8 15.6 6,247 6,956 11.3 % of sales 26.1 20.5 26.1 10 bps 560 bps 22.5 22.5 0 bps Operating profit 884 1,957 1,059 19.8 (45.9) 4,365 4,663 6.8 OPM (%) 10.2 17.6 10.5 30 bps (710bps) 15.7 15.1 (70bps) Depreciation 112 121 131 17.2 8.2 350 372 6.3 Other income 446 619 548 23.0 (11.4) 1,265 1,624 28.4 PBT 1,213 2,453 1,474 21.5 (39.9) 5,272 5,909 12.1 Tax 416 850 510 22.6 (40.0) 1,806 2,041 13.0 Effective tax rate (%) 34.3 34.6 34.6 30 bps 0 bps 34.3 34.5 30 bps Reported PAT 797 1,603 964 20.9 (39.9) 3,466 3,868 11.6 Adjusted PAT 797 1,603 964 20.9 (39.9) 3,466 3,868 11.6 NPM (%) 9.2 14.4 9.5 30 bps (490 bps) 12.5 12.5 0 bps EPS (Rs) 19.0 38.1 22.9 20.9 (39.9) 82.4 92.0 11.6 Note: FY14 comprises 15 months; Please refer to the disclaimer towards the end of the document.

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Aug-10 Jan-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Institutional Equities Exhibit 1: Financial summary Revenue 31,875 48,686 43,428 49,508 56,934 YoY (%) 15.3 52.7 (10.8) 14.0 15.0 EBITDA 5,734 8,728 7,391 8,317 9,963 EBITDA (%) 18.0 17.9 17.0 16.8 17.5 Adj. PAT 4,368 6,748 5,938 6,426 7,343 FDEPS (Rs) 103.9 128.4 141.2 152.8 174.6 YoY (%) 23.0 23.6 10.0 8.2 14.3 RoE (%) 34.9 34.0 30.2 28.2 27.9 RoCE (%) 32.4 31.1 27.2 25.8 26.0 Dividend yield (%) 0.8 0.8 1.1 1.1 1.3 P/E (x) 54.4 44.0 40.0 37.0 32.3 Note:, all ratios and per share ratios are adjusted barring absolute numbers and absolute growth Number; Exhibit 2: Our estimates versus actual performance (Rsmn) 4QFY14 2QFY15 3QFY15 YoY (%) QoQ (%) 3QFY15E Devi. (%) 3QFY15 BBE Devi.(%) Revenue 8,690 11,136 10,125 16.5 (9.1) 9,542 6.1 9,523 6.3 EBITDA 884 1,957 1,059 19.8 (45.9) 1,012 4.6 975 8.6 EBITDA (%) 10.2 17.6 10.5 29bps (712)bps 17.6 (714)bps 10.2 22bps Adjusted PAT 797 1,603 964 20.9 (39.9) 875 10.2 953 1.2 Exhibit 3: Change in our earnings estimates Y/E March (Rsmn) Old assumptions New assumptions Change (%) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E Sales 42,892 49,326 56,725 43,428 49,508 56,934 1.2 0.4 0.4 EBITDA 7,232 8,287 9,757 7,391 8,317 9,963 2.2 0.4 2.1 EBITDA (%) 16.9 16.8 17.2 17.0 16.8 17.5 16bps - 30bps APAT 5,740 6,277 7,041 5,938 6,426 7,343 3.5 2.4 4.3 Source: Nirmal Bang Institutional Equities Research Exhibit 4: One-year forward P/E (x) 50 45 40 35 30 25 20 15 10 5 0 Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research 2 GlaxoSmithKline Consumer Healthcare

Financials Exhibit 5: Income statement Net sales 31,875 48,686 43,428 49,508 56,934 % growth 15.3 52.7 (10.8) 14.0 15.0 Raw material costs 11,519 17,396 15,421 17,735 20,217 Staff costs 3,011 4,701 4,010 4,571 5,211 Advertisement costs 4,965 8,106 7,498 8,548 9,659 Royalty costs 1,056 1,568 1,380 1,587 1,825 Other expenses 5,590 8,188 7,727 8,750 10,059 Total expenditure 26,141 39,958 36,036 41,191 46,971 EBITDA 5,734 8,728 7,391 8,317 9,963 % growth 13.7 52.2 (15.3) 12.5 19.8 EBITDA margin (%) 18.0 17.9 17.0 16.8 17.5 Other income 149 332 417 458 458 Interest costs (income) (965) (1,726) (1,748) (1,601) (1,490) Depreciation 361 626 558 713 869 Profit before tax 6,487 10,161 8,998 9,663 11,042 % growth 20.1 56.6 (11.4) 7.4 14.3 Tax 2,119 3,413 3,059 3,237 3,699 Effective tax rate (%) 32.7 33.6 34.0 33.5 33.5 Net profit 4,368 6,748 5,938 6,426 7,343 % growth 23.0 54.5 (12.0) 8.2 14.3 Adjusted net profit 4,368 6,748 5,938 6,426 7,343 Reported net profit 4,368 6,748 5,938 6,426 7,343 % growth 23.0 54.5 (12.0) 8.2 14.3 Exhibit 7: Balance sheet Equity 421 421 421 421 421 Reserves 13,189 17,708 20,753 24,049 27,814 Net worth 13,610 18,129 21,174 24,469 28,235 Liabilities 13,610 18,129 21,174 24,469 28,235 Gross block 6,562 8,931 10,831 13,331 16,131 Depreciation 4,624 5,147 5,705 6,418 7,287 Net block 1,938 3,784 5,125 6,913 8,843 Capital work-in-progress 1,972 - - - - Inventories 3,696 4,074 5,206 5,373 6,793 Debtors 1,126 2,994 2,242 3,455 3,096 Cash 14,642 18,388 18,030 18,361 17,991 Other current assets 2,170 4,876 5,363 5,899 6,489 Total current assets 21,635 30,331 30,841 33,089 34,370 Creditors 4,784 6,716 6,372 8,277 8,569 Other current liabilities 7,151 9,270 8,421 7,256 6,409 Total current liabilities 11,936 15,986 14,793 15,533 14,978 Net current assets 9,699 14,345 16,048 17,557 19,392 Total assets 13,610 18,129 21,174 24,469 28,235 Exhibit 6: Cash flow EBIT 5,373 8,102 6,833 7,604 9,094 (Inc.)/dec. in working capital 2,090 (900) (2,061) (1,178) (2,205) Cash flow from operations 7,463 7,202 4,772 6,427 6,888 Other income 149 332 417 458 458 Depreciation 361 626 558 713 869 Interest paid (-) 965 1,726 1,748 1,601 1,490 Tax paid (-) (2,119) (3,413) (3,059) (3,237) (3,699) Dividends paid (-) (1,895) (2,198) (2,893) (3,131) (3,578) Net cash from operations 4,924 4,275 1,543 2,830 2,429 Capital expenditure (-) (773) (498) (1,900) (2,500) (2,800) Net cash after capex 4,151 3,777 (357) 330 (371) Cash from financial activities - - - - - Others (305) (31) 0 0 1 Opening cash 10,797 14,642 18,388 18,030 18,361 Closing cash 14,642 18,388 18,030 18,361 17,991 Change in cash 3,846 3,745 (358) 331 (370) Exhibit 8: Key ratios Y/E March CY12 FY14* FY15E FY16E FY17E Per share (Rs) EPS 103.9 128.4 141.2 152.8 174.6 DPS 45.0 45.0 59.3 64.2 73.3 Book value 323.6 431.1 503.5 581.8 671.4 Valuation (x) P/E 54.4 44.0 40.0 37.0 32.3 P/BV 17.4 13.1 11.2 9.7 8.4 EV/EBITDA 38.9 31.4 29.7 26.3 22.0 EV/sales 7.0 5.6 5.1 4.4 3.9 Return ratios (%) RoCE 32.4 31.1 27.2 25.8 26.0 RoE 34.9 34.0 30.2 28.2 27.9 Margins (%) Gross margin 63.9 64.3 64.5 64.2 64.5 EBITDA margin 18.0 17.9 17.0 16.8 17.5 PBT margin 20.4 20.9 20.7 19.5 19.4 PAT margin 13.7 13.9 13.7 13.0 12.9 Turnover ratios Fixed asset turnover ratio (x) 8.2 10.3 8.5 7.2 6.4 Avg. inventory period (days) 42 36 39 39 39 Avg. collection period (days) 12 19 22 21 21 Avg. payment period (days) 48 54 55 54 54 Solvency ratios (x) Dividend yield (%) 0.8 0.8 1.1 1.1 1.3 Growth (%) Sales 15.3 52.7 (10.8) 14.0 15.0 EBITDA 13.7 52.2 (15.3) 12.5 19.8 PAT 23.0 54.5 (12.0) 8.2 14.3 *While FY14 comprises 15 months, all ratios and per share ratios are adjusted barring absolute numbers and absolute growth number 3 GlaxoSmithKline Consumer Healthcare

Rating track Date Rating Market price (Rs) Target price (Rs) 16 June 2014 Sell 4,484 3,896 7 August 2014 Sell 4,867 3,828 7 November 2014 Sell 5,415 4,750 4 January 2015 Sell 5,603 4,750 4 February 2015 Sell 5,648 5,238 4 GlaxoSmithKline Consumer Healthcare

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