ISEC - Glaxo

ICICI Securities report on Glaxo Smithkline Consumer Healthcare:

Key takeaways from our recent interaction with the management of Glaxo SmithKline Consumer Healthcare (GSKCH) are: i) acceleration in sales growth in the current year, ii) 4% hike in product prices from June ’07 would offset input cost inflation and loss of excise exemption for the Assam unit, iii) foray into a new category by end-CY07, while actively scouting for acquisitions, iv) buyback of shares an alternative, if acquisitions do not materialise. We believe that GSKCH, the CY07E valuations at 14.3x P/E and 7.6x EV/E of which are at a significant discount to peers, is set to witness re-rating on the back of sales growth acceleration as well as launch of a new category. We reiterate GSKCH as one of our top picks in the sector.

Acceleration in sales growth.

GSKCH is witnessing a sharp acceleration in sales growth, primarily driven by improvement in the economic environment. Given the robust sales growth, the management has indicated that the company can easily achieve a mid-teen growth rate in CY07E as against an even lower double-digit growth in the past couple of years.

New category launch by end-CY07.

GSKCH is planning to launch a new category by end-CY07. The launch, which is likely to be in the health food segment, would be in a different format and could develop into a big category going forward. Further, GSKCH is expected to introduce some of its global portfolio brands in India; energy drink Lucozade would be a relevant introduction in the Indian market.

Profit margins likely to sustain.

Apart from increase in input prices, GSKCH was adversely impacted by the excise exemption loss at its Guwahati unit recently, amounting to Rs130 million on an annualised basis. However, a 4% increase in product prices from June ’07 and reduction in VAT rates to 12.5% from 20% in Kerala from April ’07 would help offset the cost increase. The management remains confident of maintaining profit margins.

Focus on long-term growth acceleration.

After Mr Zubair Ahmed’s (erstwhile Managing Director-Gillette India) coming on board as GSKCH’s managing director, the company has witnessed increased focus on long-term growth acceleration. Besides the launch of a new category by end-CY07, the company is actively scouting for acquisitions. The company aims to acquire nutritional and over-the-counter medicinal brands, technologies and businesses.

Reiterate BUY.

The next-best alternative to the acquisitions not materialising is buyback of shares. The company’s surplus cash is likely to increase to Rs 3.5 billion by end-CY07. We believe that GSKCH, the CY07E valuations at 14.3x P/E and 7.6x EV/E of which are at a significant discount to peers, is set to witness re-rating on the back of sales growth acceleration as well as launch of a new category. We reiterate GSKCH as one of our top picks in the sector.