Glaxo

 Glaxo

BPCL, Coal India, ENIL, Glaxo, Pfizer, Sun TV, Tata Steel, Ashok Leyland, Aurobindo Pharma, BPCL, SBI, Eicher Motors, Nestle

BPCL, Coal India, ENIL, Glaxo, Pfizer, Sun TV, Tata Steel, Ashok Leyland, Aurobindo Pharma, BPCL, SBI, Eicher Motors, Nestle 

Metals, Financials, Glaxo

Metals, Financials, Glaxo

Coal India, IT Services, Real Estate, Glaxo, Larsen and Tourbo

Coal India, IT Services, Real Estate, Glaxo, Larsen and Tourbo

BPCL, HPCL, Bilcare, India Cement, Gujarat Gas, Tata Motors, Everonn, Glaxo, Tata Power, Apollo Hospitals

BPCL, HPCL, Bilcare, India Cement, Gujarat Gas, Tata Motors, Everonn, Glaxo, Tata Power, Apollo Hospitals

GSK Consumer

GSK Consumer

IDFC, India Technology, India Energy, Punj Lloyd, Glaxo, Hindalco

IDFC, India Technology, India Energy, Punj Lloyd, Glaxo, Hindalco

Punj LLoyd, Hindalco, Glaxo, India Technology

Punj LLoyd, Hindalco, Glaxo, India Technology

Glaxo India

Glaxo India

NTPC, Sterlite Industries, United Phosphorous, Glaxo, Dabur, Maharashtra Seamless, India Strategy

NTPC, Sterlite Industries, United Phosphorous, Glaxo, Dabur, Maharashtra Seamless, India Strategy

Glaxo

Glaxo

Glaxo, GAIL, Sadbhav Engineering, Shriram Transport, Mahindra Finance, India Strategy

Glaxo, GAIL, Sadbhav Engineering, Shriram Transport, Mahindra Finance, India Strategy

GSK Consumer

GSK Consumer

GlaxoSmithKline Consumer

With a limited product portfolio and unexciting historic growth, GlaxoSmithkline Consumer Healthcare (GSK Consumer) has traded at a significant valuation discount to FMCG peers, in the stock market. However, the company’s stock now merits a re-rating, after renewed efforts by the company to enter new categories, an accelerated pace of new launches and strong profit growth in recent quarters.

Investors can consider accumulating the stock even after its 33 per cent gain from the March lows, as the stock’s discount to peers offers upside potential.

At its current price of Rs 828, the GSK Consumer stock trades at a PE of 16 times trailing 12-month earnings while multiples hover at 22-24 times for Nestle India, Colgate Palmolive, Godrej Consumer and Dabur. The stock is at about 14 times its estimated earnings for 2009, again at a sizeable discount to most rivals.
Strong volumes

After managing a 14 per cent compounded annual growth in sales in the three years to 2007, GSK Consumer’s sales growth shot up to 21 per cent for 2008. Strong volume growth in the Horlicks franchise driven by higher offtake and brand extensions, higher realisations due to price increases and a surge in export revenues aided this improvement.

A sharp increase in input costs prevented the expansion in topline from being mirrored in net profits, which rose by a muted 15 per cent. 2008 saw a sharp upward spiral in prices of inputs such as wheat, malt extracts and milk.

Numbers for the March 2009 quarter show that the company has sustained its growth momentum this year. Net sales were higher by an impressive 31.4 per cent in the first quarter.

Though excise duty savings brought in about 3 per cent of this expansion, this was also backed by an impressive volume growth of 20 per cent (21 per cent in Horlicks, 8 per cent for Boost and 27 per cent for biscuits).

A 13 per cent growth in domestic offtake of malted drinks led mainly by Horlicks, a 3.5-4 per cent pipeline filling for new products and a surge in exports helped drive this growth.

Given that malted drinks remain an under-penetrated category, promotional efforts, better distribution reach and a value-oriented strategy hold further potential to increase domestic sales.
Leg up from exports

GSK Consumer’s exports to neighbouring markets such as Sri Lanka, Nepal, Bangladesh and West Asia have also been a key driver, seeing a 45 per cent expansion in the first quarter.

A shifting of the manufacturing base for some products to India (by the parent) and market share gains for brands for Horlicks and Boost in these markets have both helped this growth. The latter ties in with the headway made by many Indian FMCG brands in the neighbouring markets.

Exports, which have been a key contributor to GSK Consumer’s growth in recent quarters, also hold further potential for scaling up.

The March 2009 quarter saw GSK Consumer’s net profits expand by a higher than expected 48 per cent, on the back of higher operating profit margins.

Higher realisations resulting from price increases (of 5.5 per cent) taken in January 2009 and benefits from excise duty cuts (about 60 per cent of the company’s manufacture is subject to excise duty) triggered margin expansion.

Though input cost pressures did not abate materially (material/packaging costs up by 28 per cent over last year), they were more or less offset by the price increases and a cutback in advertising and promotional spends for the quarter, as the company temporarily “tightened its belt” on ad spend.

While inflationary pressures are likely to subside a little in 2009 (malt extract and packaging prices have corrected, while milk and sugar remain upward bound), the company is unlikely to see substantial savings in input costs, as will some other FMCG makers.

However, that is not a big concern, given GSK Consumer’s dominant share of malted drinks market (70 per cent, straddling brands such as Boost, Viva and Maltova and Horlicks) which endows it with strong pricing power.

While the company has delivered exceptional profit growth in the latest March quarter, growth of this order is unlikely to be sustained in the coming months and may moderate to the 20 per cent range.

As GSK Consumer steps up its pace of product launches and supports them with brand building efforts, ad spends may climb back to 13-14 per cent of sales, from the current 11.5 per cent.
Broadening the basket

GSK Consumer has already embarked on a two-pronged strategy to expand its somewhat narrow product portfolio.

First, it plans to leverage the Horlicks brand to launch a wider range of nutrition products and functional foods. Second, it plans to draw more actively on its parents’ portfolio for the Indian markets.

Junior Horlicks and Mother’s Horlicks have already captured key niches in the beverage market and Horlicks Lite (suited to Diabetics) Women’s Horlicks (specially formulated for women) have added to this set of extensions in 2008.

The first quarter of 2009 has seen GSK Consumer’s foray into functional foods through the launch of Horlicks Nutribar, a healthy snacking option for young adults. ActiGrow, a high-protein baby food, was also rolled out this quarter. These supplement Horlicks and Lite Bite biscuits which are targeted at children.

The brand Horlicks has also been extended into the ready to drink (RTD) segment, through tetra packs. While a foray into RTD has already been attempted in the past, the foray into functional foods holds considerable promise for broadening the company’s portfolio.

While the new category forays will peg up advertising and brand building spends over the next two years, they have the potential to reduce the company’s significant reliance on one brand (Horlicks) and one category (malted drinks) for growth and profitability. That may remove a key impediment to better valuations for the stock.

India Strategy, Ranbaxy, Glaxo, Banks

India Strategy, Ranbaxy, Glaxo, Banks

Valuations Summary, Economy, Glaxo, Automobiles

Valuations Summary, Economy, Glaxo, Automobiles

Sun TV, Sesa Goa, Glenmark, Educomp, Corporation Bank, Glaxo, Nagarjuna Constructions, LT, United Spirits

Sun TV, Sesa Goa, Glenmark, Educomp, Corporation Bank, Glaxo, Nagarjuna Constructions, LT, United Spirits

Glaxo

FMCG stocks have withstood the market fall better than others, but with the ongoing ‘flight to safety’ bidding up their prices, frontline stocks in the sector are now quite expensive in relation to the rest of the market. GlaxoSmithKline Consumer Healthcare — a mid-sized FMCG company — is an exception to this.

At the current market price of about Rs 545, the stock trades at a PE of just about 11 times its estimated earnings for CY2009, at a substantial discount to companies such as Dabur India and Nestle India. Investors can accumulate the stock.

Given the limited liquidity in the stock and the risk of further downside for the market, acquiring the stock in a phased manner is advisable.

The stock is well suited for an investor seeking a 15 per cent annual return with relatively low downside risk.
Extensions drive volumes

With a 70 per cent market share, GSK Consumer Healthcare dominates the nutritional drinks market with brands such as Horlicks, Boost, Viva and Maltova in its portfolio. Distribution of OTC brands such as Eno, Iodex and Crocin on behalf of a group company also brings in stable ‘other income’.

Sales growth for the company, which hovered in the low double-digits until 2007, has seen a sharp acceleration this year.

Compared to a four-year annualised growth rate of about 16 per cent, net sales expanded at 23 per cent in the first half of 2008. This was aided both by healthy volume growth (about 13 per cent) as well as price increases (about 6-7 per cent).

Higher volume growth this year has been driven by product launches such as ‘limited edition’ variants for Boost, Actibase — a specialist nutritional supplement, and brand extensions for Horlicks such as Women’s Horlicks and Horlicks Lite.

The company has continued to ramp up ad spend, while using celebrity endorsements to build its brands.
Limited down-trading risk

Volume growth may be sustained at higher levels over the next couple of years, given the clear consumer trend in favour of health and nutritional products, and efforts by the company to address a larger consumer base through extensions such as Horlicks Lite (targeted at adults) and Women’s Horlicks.

The company’s increased spending on brand-building (up from 9-10 per cent of sales to 12-13 per cent in recent quarters) and launch opportunities from its parent’s portfolio, also hold promise for volume growth.

The potential to improve capacity utilisation from the current 75 per cent levels and plans to add capacities over the next three years at an investment of Rs 110 crore, may also help the company capitalise on strong offtake.

Despite price increases of 6-7 per cent last quarter, volume growth for the company is at relatively low risk from down-trading (companies moving to cheaper substitutes), given the company’s dominant market shares, presence across price points with its four brands and few competing brands.
Input prices offer relief

While sales growth may remain healthy, the company’s plan to increase brand-building spends was expected to lead to slower profit growth over the next couple of years.

In the June quarter, the company’s 19 per cent sales growth translated into just a 9 per cent expansion in net profit, as escalating raw material costs and sharply higher ad spend (28 per cent increase against 19 per cent sales growth), impacted net profits.

However, on this count, a sharp correction in raw material prices, triggered by the commodity price meltdown since July and a benign outlook on input prices over the next few quarters, augur well for GSK consumer’s margins.

Milk, malt extracts and wheat are the key inputs, and all three commodities have seen a correction in prices over the past few months.

Global milk powder prices have corrected over 30 per cent from their July peak, with a further softening of 16 per cent forecast for the next one year.

Wheat prices have also slumped sharply on expectations of a sharp increase in global output; domestic prices are expected to remain soft in the current year, on account of record production and a comfortable buffer stock. Malt prices are also off their earlier highs, though prices are expected to remain at the current levels over the next few months.

Though a depreciating rupee may offset some of the benefits from these falls, the correction in prices has still been steep enough to offer some cost savings.

In the light of the price increases already taken by the company, softer trends in input prices have the potential to expand operating profit margins for GSK Consumer in the quarters ahead. The resulting surpluses may also be used to finance promotional and brand-building spends, which will also help profit growth over the medium term.

GSK Pharma

GSK Pharma

Bank of Baroda, India Cements, Cairn, GSK Consumer, GAIL, Godhavari Power, Adhunik Metalliks

Bank of Baroda, India Cements, Cairn, GSK Consumer, GAIL, Godhavari Power, Adhunik Metalliks