2QCY2012 Result Update | FMCG

August 9, 2012

GSK Consumer
Performance Highlights
Quarterly Result
(` cr) Revenue EBITDA OPM (%) PAT 2QCY12 730 111 15.2 107 2QCY11 653 99 15.1 82 % yoy 11.7 12.3 9bp 29.3 1QCY12 813 162 19.9 132 % qoq (10.2) (31.5) (472)bp (19.2)

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 11,886 (1,080) 0.3 2940/2179 6,523 10 17,561 5,323 GLSM.BO SKB@IN

`2,826 -

Source: Company, Angel Research

For 2QCY2012 Glaxosmithkline Consumer Healthcare Ltd (GSK Consumer) posted an 11.7% yoy growth in its net sales, aided by a ~7% volume growth and ~8% value growth in the domestic business. The companys major brands in the malted food drink (MFD) division - Horlicks and Boost posted volume growth of 4% and 11% respectively. During the quarter, the overall sales growth was affected by a flat growth in the canteen stores division (CSD) and a 10% decline in export sales (due to a higher base effect). Key highlights of the quarter: GSK Consumer recorded a 360bp yoy expansion in its gross margin to 63.0% due to higher realizations and only a marginal y-o-y increase in input costs. However, the OPM remained flat y-o-y at 15.2% largely on the back of a 247bp yoy increase in other expenses on a low base. During 2QCY2011, the companys other expenses were lower due to 50 days shutdown of a factory for capacity expansion. The earnings for the quarter grew by 29.3% yoy to `107cr (`82cr in 2QCY2011) aided by higher other income (up ~59% yoy), and business auxiliary income (up ~40% 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 22.8x CY2013E EPS of `123.8. We continue to remain Neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 43.2 16.5 15.8 24.6

Abs. (%) Sensex SKB

3m 6.6 4.0

1yr 4.2 19.5

3yr 15.8 152.4

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 39.7 12.4 32.2 36.9 4.7 29.0

CY2011 2,686 16.5 362 20.8 15.8 86.0 32.8 10.4 33.8 37.2 4.0 25.4

CY2012E 3,124 16.3 439 21.4 17.1 104.5 27.1 8.4 34.4 39.8 3.4 20.2

CY2013E 3,663 17.3 520 18.5 17.6 123.8 22.8 6.8 32.8 38.0 2.8 16.4
Amit Patil 022-39357800 Ext: 6839 amit.patil@angelbroking.com

V Srinivasan
022-39357800 Ext: 6831 v.srinivasan@angelbroking.com

Please refer to important disclosures at the end of this report

GSK Consumer | 2QCY2012 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

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 25.3

2QCY11 653 266 40.6 68 10.4 100 15.3 121 18.6 555 99 15.1 0.9 11 36 122 122 18.7 40 32.6 82 12.6 4.2 19.6

% yoy 11.7 1.8 16.4 16.1 26.6 11.6 12.3 9bp (7.8) (24.4) 59.0 29.6 29.6 30.3 29.3

1QCY12 813 330 40.6 66 8.1 109 13.4 146 17.9 651 162 19.9 1.2 12 48 196 196 24.2 64 32.8 132 16.2 4.2

% qoq (10.2) (18.2) 19.7 6.4 5.3 (5.0) (31.5) (472)bp (29.7) (28.3) 19.5 (19.3) (19.3) (19.4) (19.2)

1HCY2012 1HCY2011 1,543 601 38.9 145 9.4 225 14.6 299 19.4 1,270 272 17.7 2.0 20 105 355 355 23.0 116 32.8 239 15.5 4.2 1,363 535 39.3 130 9.6 204 14.9 250 18.3 1,119 244 17.9 1.6 22 69 290 290 21.2 97 33.5 193 14.1 4.2 46

% chg 13.2 12.2 11.3 10.6 19.8 13.5 11.5 28.8 (8.0) 52.0 22.5 22.5 20.1 23.8

29.1

31.3

(19.2)

57

23.6

Exhibit 2: Actual vs Angel estimates

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

Actual 730 111 15.2 107

Angel Est 797 139 17.5 107

% chg (8.4) (20.6) (233) (0.7)

Flat CSD growth and decline in exports affect sales growth: GSK Consumer posted a top-line growth of 11.7% yoy to `730cr (`653cr in 2QCY2012), led by ~7% volume growth and ~8% value growth in the domestic business. During the

quarter, the overall sales growth was affected by a flat growth in CSD and a 10% decline in export sales (due to higher base effect).
During 2QCY2012, the major brands in the MFD category - Horlicks and Boost posted a volume growth of 4% and 11% respectively. The biscuits division grew by ~27% yoy. Horlicks Oats, which was launched in 4QFY2012, has already garnered market share of ~11.5% in south India.

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GSK Consumer | 2QCY2012 Result Update

Exhibit 3: Top-line growth at 11.7% yoy

900 800 700 600 (` cr) 500 400 300 200 720 613 508 710 653 720 602 813 100 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 730 9.5 17.5 23.7 21.4 21.6 17.5 18.6 14.5 11.7 25.0 20.0 15.0 10.0 5.0 (yoy %) (yoy %)

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

yoy growth (RHS)

Exhibit 4: Muted volume growth

25 20 15 (%) 10 5 20 15 16 10 11 8 7 7 7 2Q12 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 5.0 5.0 7.0 5.0 5.0 8 8 8 8 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 -

Volume (LHS) Source: Company, Angel Research

Value (RHS)

Gross margin expands aided by higher realizations: During 2QCY2012, GSK Consumer recorded a 360bp yoy expansion in its gross margin to 63.0% due to higher realizations and only marginal yoy increase in input costs. However, the OPM remained flat y-o-y at 15.2%, largely on the back of a 247bp yoy increase in other expenses. During 2QCY2011, the companys other expenses were lower due to 50 days shutdown of a factory for capacity expansion. Earnings growth aided by higher other income: Earnings for the quarter grew by 29.3% yoy to `107cr (`82cr in 2QCY2011) aided by a higher other income (up 59% yoy) and business auxiliary income (up 40% yoy).

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GSK Consumer | 2QCY2012 Result Update

Exhibit 5: Gross Margin and OPM

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

Exhibit 6: PAT grows by 29.3% yoy

150 130 110 (` cr) 90 70 50 103 111 103 132 79 53 82 59 30 10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 107 31.1 30.9 15.0 14.9 10.7 31.1 58.5 70.0 19.3 29.3 60.0 50.0 (yoy %) 40.0 30.0 20.0 10.0 2Q12

(%)

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

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 22.8x CY2013E EPS of `123.8. We continue to remain Neutral on the stock.

Exhibit 7: Change in estimates

Old estimates (` cr) Revenue OPM (%) EPS (`) CY2012E 3,124 17.1 103.0 CY2013E 3,663 17.6 123.3 New estimates CY2012E 3,124 17.1 104.5 CY2013E 3,663 17.6 123.8 % chg CY2012E 1.4 CY2013E 0.4

Source: Company, Angel Research

August 9, 2012

GSK Consumer | 2QCY2012 Result Update

Exhibit 8: One-year forward P/E chart

35.0 30.0 25.0 20.0 (x) 15.0 10.0 5.0 May-09 May-10 May-11 May-12 Jan-09 Mar-09 Jan-10 Mar-10 Jan-11 Mar-11 Mar-12 Jan-12 Jul-08 Jul-09 Jul-10 Jul-11 Sep-08 Sep-09 Sep-10 Nov-08 Nov-09 Nov-10 Sep-11 Nov-11 Jul-12 Source: Company, Angel Research, Note: Blue line indicates 5-year average

Exhibit 9: 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) 35,970 5,448 16,185 20,911 21,483 11,886 105,713 208,517 11,944 42,830 8,079 CMP (`) 3,750 456 1,190 120 623 2,826 487 266 194 4,442 131 TP (`) 633 Upside (%) 39 P/E (x) FY13E 31.0 22.0 34.4 26.9 27.3 27.1 34.2 28.7 29.3 38.7 20.8 FY14E 25.9 16.6 29.0 23.2 22.9 22.8 29.6 24.7 23.9 31.8 17.5 EV/Sales (x) FY13E 3.1 0.9 5.2 3.4 3.5 3.4 3.9 6.7 2.6 4.9 1.0 FY14E 2.6 0.8 4.5 2.9 3.0 2.8 3.4 5.8 2.1 4.1 0.9 RoE (%) FY13E 37.4 42.7 99.5 43.2 31.2 34.4 70.9 35.6 30.0 71.2 8.6 FY14E 35.3 44.3 94.1 41.4 30.0 32.8 59.8 35.0 28.8 60.3 9.5 CAGR # Sales 17.0 17.4 12.8 15.3 20.1 16.8 15.5 16.9 16.5 16.5 9.7 PAT 18.5 32.7 11.7 18.3 26.7 21.0 17.6 17.0 25.1 15.0 16.9

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.

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GSK Consumer | 2QCY2012 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 4 172 26.1 661 22.3 661 221 33.5 439 439 439 21.4 14.1 104.5 104.5 21.4 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 4 199 25.4 2.00 783 44.9 783 262 33.5 520 520 520 43.8 14.2 123.8 123.8 43.8

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GSK Consumer | 2QCY2012 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 1,730 1,106 119 505 891 839 1,371 977 535 442 127 66 2,057 1,339 139 579 973 1,084 1,720 42 719 761 7 767 42 863 905 (11) 894 42 918 960 (27) 933 42 1,102 1,144 (40) 1,104 42 1,369 1,411 (40) 1,371 42 1,717 1,760 (40) 1,720 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 661 42 (44) (59) 221 (35) 343 203 (203) 172 (59) (113) 27 1,080 1,106

CY13E 783 57 (9) (67) 262 (4) 497 160 (160) 172 (67) (105) 232 1,106 1,339

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GSK Consumer | 2QCY2012 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 39.8 226.1 34.4 38.0 121.0 32.8 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 35.0 272.1 104.5 104.5 114.5 35.0 335.6 123.8 123.8 137.2 35.0 418.4 62.6 51.3 15.6 0.5 7.4 48.1 14.9 51.6 43.3 13.1 0.6 5.8 35.6 12.4 39.7 35.0 12.4 1.8 4.7 29.0 11.7 32.8 29.6 10.4 1.2 4.0 25.4 9.8 27.1 24.7 8.4 1.2 3.4 20.2 7.9 22.8 20.6 6.8 1.2 2.8 16.4 6.1 CY08 CY09 CY10 CY11 CY12E CY13E

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GSK Consumer | 2QCY2012 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%)

August 9, 2012