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GlaxosmithKline Consumer (SKB)
Consumer products
Watch for announcement of CY2011-14E targets. We revisit our favorable
arguments regarding GSK in our note dated September 20, 2010, “MFD category in
fine fettle; GSK is one of our preferred picks” after a meeting with management. The
recent repositioning of the Horlicks brand as a range of health foods and beverages
rather than just as a health drink brand is a good move, in our view. While the
management reserved its comment on the next four-year plan (CY2011-14E), it is likely
targeting a sales growth higher than 19% CAGR (CY2006-10E target), in our view.
High on confidence—takeaways from meeting with management
Company has a total reach of 1.2 mn and a direct reach of 0.6 mn (an increase of 30% over
the last one year). This was achieved through application of 80:20 principle in rationalizing the
number of distributors to 500 from 1,800 and redeploying the resources to increase coverage.
60% of the management team is relatively new (joined in the last two/three years) and are
mostly with experience in other consumer companies (HUL, P&G, Heinz etc.).
While category mix is still dominated by Horlicks, the success of variants has ensured that the
contribution of base Horlicks has gone down. Currently, Horlicks accounts for 69% of sales,
Brand extensions of Horlicks in MFD category is 16%.
Contrary to popular perception, the company has meaningfully diversified its portfolio—Horlicks
core is a Rs13 bn brand, Women’s Horlicks Rs250 mn (in <two years of launch), Junior Horlicks
Rs2 bn, Horlicks Lite Rs400 mn and Mother’s Horlicks Rs400 mn. Foodles has achieved a
turnover of Rs270 mn in 9MCY10 (~2% of growth in the first year!).
South India still dominates the sales mix for GSK with 48% of sales. East accounts for 37%,
whereas North & West account for 12% and sales to defence is 6%.
We note the optical opportunity for penetration-led growth in North & West exists. However, it
will be a tough task to convince the relevant consumer as the adequate availability of milk and
milk products and consumption of milk-based products (cottage cheese, butter milk, sweets
etc.) limit the relevance of a milk-based drink in these regions. We note that Boost (chocolatebased
brown health drink based on energy proposition) has the opportunity to drive growth in
North & West.
We agree with the opportunity to drive penetration and consumption-led growth—the 2/10
and 4/12 matrix—2 out of 10 consumers buy Horlicks and consumes in 4 out of 12 months.
The company has implemented another price increase of 5% in November 2010 (after a
5% increase in January 2010)—confirming our long-standing thesis about the newly
found confidence of the company in implementing price increases when faced with input
cost inflation and also to generate resources to fund new launches.
Company pays a brand royalty of 5% to parent for Horlicks brand. However, for new
product development, it has a moratorium of three years (no royalty) and then it is a stepup
arrangement (1% in year 4, 2% in year 5 and 5% from year 6 onwards).
GSK remains one of our preferred picks
We maintain our ADD rating and our positive bias on GSK as we forecast 23% CAGR EPS
growth in CY2009-11E. Our EPS estimates are Rs70.5 for CY2010E and Rs83.9 for CY2011E,
respectively. There is upside risk to our estimates on the back of (1) continued strong growth
in Horlicks, and (2) higher-than-expected growth in Foodles. Our TP is Rs2,400. Key risk to
our ADD rating is input cost inflation or potential increase in Cenvat rates not neutralized by
price increases.
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