GSK-CH reported one more good year, with revenue and earnings in CY10 growing 20% and 29% respectively. Based on its CY10 annual report, we slightly raise our estimates and retain our Buy recommendation and target price of `2,755.
n Cost management drives profitability. Cost-cutting measures have resulted in reduction in staff costs in CY10 (as a percentage of net sales) by 40bps and other expenditure by 60bps yoy. Such costs (as a percentage of net sales) have dropped 312bps over CY02-10.
n Improving productivity. The company has been able to improve the input-output ratio in CY10 as well. Increase in production at its new plant at Sonepat and refurbishment of its Rajamundry plant is helping reduce normal loss and hence improve efficiency.
n Management confident about growth. Management has listed various growth triggers: rising urbanization, low rural penetration, mounting modern trade and rising income levels. However, inflation is the key concern.
n Change in estimates. Post our CY10 annual report update, we raise CY11e revenue and PAT 1.9% and 0.5% respectively. We raise CY12e revenues 2.6%, but lower earnings 0.9%.
n Valuation and risks. We maintain Buy and our target price of `2,755, based on target PE of 25x CY12e earnings. Our target PE is at a 50% premium to the 12-month-forward Nifty PE. Key risks are higher raw material prices and competition.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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