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Glaxosmithkline Consumer Healthcare Limited
Initiation ; Overweight ; GLSM.BO, SKB IN
Taller, Stronger and Sharper
• We initiate with an Overweight rating and a Dec-11 price target of
Rs2580, based on 1.5x PEG, in line with local peers (equivalent to 29x
CY11E and 25x CY12E EPS). Our PT implies potential upside of 23% from
current levels. GSK Consumer is the market leader in India’s malted food
drinks category with over 70% share, and enjoys strong brand equity with a
pan-India distribution network. It benefits from astute marketing and
innovation, which in our view should continue to support market share
gains and mix enhancements. We expect improving margins, strong free
cashflow and potentially higher dividend payout to support price
performance.
• Growth strategy based on nutrition, widening distribution reach, and
expanded product portfolio: We expect the company to deliver 21%
earnings growth over CY10-12E based on high growth prospects for the
processed foods category, a strong and differentiated product portfolio, and
favorable margin outlook. It is one of the few companies in the consumer
space that does not face significant competitive challenges. Diversification
of the product portfolio (towards high-growth segments like instant noodles,
biscuits & energy drinks), expanding direct distribution reach and rising
scale of modern retailing should support healthy sales growth.
• Margins to benefit from price hikes and moderation in A&P spend. We
expect margins to trend up despite high commodity prices owing to its high
pricing power and superior gross margin profile. Ad spend, currently at peak
levels of 16%, is likely to drop from CY11/12 as new products ramp up,
further supporting margin expansion.
• Improvement in return ratios; Use of cash will be crucial. We expect
better working capital efficiency and limited capex requirements to support
high FCF generation. GSK had cash and equivalents amounting to
Rs225/share (c10% of MCap) as of Dec’10. We believe an increase in the
dividend payout remains a strong possibility in coming years given the lack
of suitable inorganic growth opportunities in the domestic market.
Investment thesis
GlaxoSmithKline Consumer Healthcare (GSKCH) is an attractive play on fastgrowing processed foods market. Marked by low penetration levels and dominated
by unorganized players, we believe the Indian processed foods market holds
substantial potential for an organized player like GSK Consumer whose products
enjoy strong brand equity. GSKCH is the market leader in the malted beverages
category (market share of over 70% as of CY10) with brands such as Horlicks,
Boost, Maltova and Viva. Over the past 3-4 years company has taken a more
aggressive and innovative approach to diversify its product portfolio in order to meet
its target of doubling turnover in four years over 2007-11. Besides strong growth
potential in the malted beverage space, the company is aggressively leveraging on its
strong Horlicks brand to enter other processed food categories like Noodles, Biscuits
and nutritional bars. We expect more product introductions from the global portfolio
of the parent.
We initiate coverage on the company with an Overweight rating and Dec’11 target
price of Rs2580, implying 23% upside from current levels.
Investment Positives
Synonymous with malted beverages
GSK Consumer is the market leader in India’s malted beverage segment which is
estimated by the company to be worth Rs28bn. Its flagship brand Horlicks dominates
the category with 53% share and is arguably almost synonymous with health
beverages in the country. It is one of the very few brands in the country which has
enjoyed such high brand equity for several decades. The brand is strongly associated
with health and wellness led by scientific claim-driven advertising; in the annual
survey of India's Most Trusted Brands conducted by the Economic Times, Horlicks
was in the top 6 in 2009. Horlicks was at the top of the beverage category as India's
Most Trusted beverage brand.
We think the strength of Horlicks’ brand equity can be gauged from the fact that
other multinationals like Nestle India (Milo brand) and Hindustan Unilever (Amaze
brand) have been unsuccessful in penetrating the malted food segment despite
considerable investments. Dabur India's foray into this space with Chyawan Junior
has also met with a subdued consumer response.
GSK Consumer’s other leading brand Boost with 15% market share has grown
considerably in recent years posting 25% sales growth in CY10. This brand is
benefiting from growing peneration in northern and western parts of the country
where GSK Consumer has been traditionally weak in terms of distribution reach.
Attractive volume growth and pricing power
Over CY2006-10 GSKCH’s volume sales have grown at a CAGR of 12%
considerably ahead of 2% growth registered in previous five years (CY2001-06). The
acceleration in growth has primarily been driven by its aggressive approach towards
1) increasing penetration in north and west India (traditionally weak markets for
GSKCH) which have lower penetration of malted foods (10-15% vs 25% in the rest
of India), 2) Shift in usage of the product from being a milk substitute to milk
additive, 3) Various brand extensions (Women’s Horlicks, Horlicks Lite, Junior
Horlicks, Mothers Horlicks) which are growing sales at a faster pace (c25-30% over
CY10 and now contribute 18% of brand revenues), and 4) Growing distribution
reach (direct reach increased from 0.5mn outlets in CY09 to 0.66mn outlets in
CY10). Boost has particularly seen 25% increase in its distribution reach over last
one year.
We expect GSK Consumer to sustain 10-12% volume growth for the malted health
food drink product portfolio driven by 1) increased penetration of the products
(current penetration rates for malted foods is just c25% in the country), 2) higher
usage (to improve the purchase frequency of existing customers) aided by scientific
claims about nutritional benefits, 3) new variant launches, and 4) increasing
distribution reach.
While growth of the Horlicks brand is likely to be driven by category expansion
(two-thirds of growth comes from new users), Boost brand sales should benefit from
market share gains. For the other smaller MFD brands – Maltova and Viva – the
focus is to grow profitability more than the top line. Further, GSK is looking to get
more customers on board via enhanced product affordability. Introduction of low unit
packs (which currently account for c1.5% of turnover and growing upwards of
c30%) is a step in that direction and management is hopeful to increase their share
going forward.
GSKCH has been test marketing a low price malted beverage brand (Asha) in
Southern India priced at Rs85 (40% discount to Horlicks) for quite some time now.
However management noted that test market results are not yet positive for a
commercial launch. We believe cannibalization of the regular brand and potential
risk of lower margins are key impediments for wider distribution for this product.
With over 70% share in malted beverage segment, GSKCH holds good pricing
power and it has successfully undertaken 5-7% annual price hike over past four years
without affecting volume offtake. We expect pricing growth of 5-6% p.a. over the
next three years for the malted beverage portfolio of the company.
Diversifying product portfolio and step-up in product
innovation
GSK Consumer’s dependence on malted beverages remains quite high (95% revenue
contribution). In order to lower this dependence, the company is leveraging on the
strong brand equity of its Horlicks brand to other processed foods categories. It is
also looking to expand its product offering by introducing key brands from its global
portfolio. We expect these new launches will further add to strong growth seen in the
MFD category.
Its recent foray into the instant noodles segment under the brand Foodles has started
on a successful note. In a year of its launch it has captured 6% share in Southern and
Eastern India and on a pan India basis this brand now accounts for c3% share. The
company is currently in the process of expanding its reach in northern and western
India and has gone ahead with a nationwide TV campaign for the same. Management
has set some ambitious targets for this brand, aiming for 15% share over next three
years and increasing product reach from 0.2mn outlets currently to 0.5mn outlets
over similar period.
While the company has been present in the biscuits category (4% of sales), it has relaunched the Horlicks biscuit portfolio now and has introduced Rs5/10/15/20 price
points for the same. In order to enhance profitability for this segment, the company
has recently introduced premium SKUs like creams, cookies etc. GSK registered
over 30% sales growth for its biscuits portfolio in CY10 with Q4CY10 witnessing
very strong growth of 71% owing to recent launches of premium range of cookies,
creams and cereal based biscuits. We anticipate biscuits to register 20-25% growth
over the next three years supported by recent launches and extended distribution.
During 2009 the company launched Horlicks Nutribar, a high nutrition cereal bar
offered as a healthy snack between meals. It also launched premium protein
supplements – Acti-grow and Acti-base.
In order to widen its product offerings, GSK Consumer is also actively looking to
introduce global brands from the parent’s stable. It recently launched Lucozade
Sport, a sports drink, in the Indian market. Lucozade is already a well-established
sports drink brand in the UK and has presence in several other international markets
We expect its business auxiliary income to also be supported by new brands such as
Breathe Rite nasal strips and Sensodyne toothpaste, for which it receives commission
from the distribution for these products.
Upside to operating margins exists
During CY10 EBITDA margins for GSK Consumer expanded 10bp despite 50bp
decline in gross margins and A&P spend being the highest ever at 16.1% of sales.
Better SG&A leverage aided stable margins in CY10. We expect EBITDA margins
to move up during CY11 as Advertising & Promotion spend as % of sales
normalizes, with investments in new categories moderating. Further, we expect gross
margin pressure to be largely mitigated in coming quarters on account of recent price
hikes (5% price hike in Nov’10). Focus on cost management and better volume
leverage should further support margin expansion.
As scale for new products increases, A&P as % of sales will moderate and we
estimate this to decline from 16.1% in CY10 to 15.7% in CY12. We estimate 90bp
expansion in EBITDA margins over CY10-12E driven by lower A&P/Sales, better
SG&A leverage and price increases.
Investment Negatives/Risks
High dependence on a single category
Malted food accounted for nearly 95% of the company’s turnover in CY10 and such
high dependence on one category could constrain earnings growth. Other key players
in the processed food segment like Nestle India are well diversified and growth for
such companies is relatively more broad-based. However, over the past two years
GSKCH has made significant investments to expand its presence in non-malted food
segments. Growth in the biscuits portfolio has been strong, and the recent foray into
instant noodles has also met with good success so far. The company has also entered
into the niche nutritional bar segment, which is quite a nascent category in India. It is
also looking to introduce brands from GSK’s global portfolio in India (such as
recently launched sports drink Lucozade).
Competitive intensity in noodles and biscuits categories
remains stiff
Three-quarters of the Indian biscuits market is dominated by three players,
Britannia, Parle and ITC, and the extremely price sensitive nature of this segment
makes the competitive environment quite challenging. Price and product
segmentation is quite high in this category implying product differentiation is tough.
In order to compete effectively and gain share (we estimate GSK Consumer holds 1-
2% share in biscuits category), significant brand investments might be needed.
Looking to target a piece of the fast growing noodles market (sales estimated by
industry sources to be growing at 20-25% p.a.), GSK’s offering is in direct
competition with Nestle’s Maggi (with 85%+ share), HUL’s Knorr Soupy Noodles (a
recent entrant) and ITC’s Yippee Noodles (recent entrant).
Unlike MFD, pricing power in biscuits and noodles will be relatively lower for GSK
Consumer considering the well entrenched players in both these categories
Valuation and share price analysis
Share price performance
GSKCH’s consistent performance in terms of revenue and earnings growth makes us
confident about the company’s management and strategy for growth. Its performance
has been reflected in the recent upward share price run. The stock has run up by 16%
over the past six months, outperforming the Sensex by 15%. We expect the
outperformance to continue as earnings growth remains strong in coming quarters.
Key growth catalysts would be robust volume growth across high growth categories
(like malted foods, instant noodles and biscuits), supported by healthy margins and
continuous product innovation. Success of new products could further add to growth.
Comparable Valuations
GSKCH has historically traded at lower multiples and at a discount to mid cap
FMCG companies. This was on account of its lower ROEs due to lower dividend
payout. Over the past two years GSKCH’s P/E multiple has expanded substantially.
It is currently trading at 24x CY11 and 20x CY12 earnings estimates. When
compared to Nestle India, GSKCH is trading at a 25% discount on CY11/12
earnings.
The stock is trading at a discount of 10-20% compared with other domestic consumer
companies like HUL, Dabur, Colgate-Palmolive India and Nestle India on a PEG
basis. Compared with global food companies, GSK Consumer is trading at a discount
of 15-20% on a PEG basis.
Price target and recommendation
Valuations for GSK Consumer have moved up significantly since 2009 driven by the
company’s more aggressive approach towards product portfolio expansion along
with healthy volume and earnings growth trends. However, the stock has corrected
c10% YTD and we believe this provides a good entry opportunity. The stock
currently trades at 24x CY11 and 20x CY12 earnings estimate. We base our target
price on PEG of 1.5x which is in line with average PEG ratio for Indian consumer
staple companies. Our Dec-11 price target is Rs2580, implying CY11E and CY12E
P/E of 29x and 25x respectively, supported by an earnings CAGR forecast of 20%
over CY11-13E and strong volume growth and rising penetration of processed foods
in the country. We think GSK Consumer’s differentiated product portfolio combined
with strong brand equity should help the company to grow its share of the fast
growing convenience food and beverage space.
In our view, given that valuations look reasonable and the earnings growth outlook is
healthy, we expect the company to outperform the market and the staples space and
hence assign an Overweight rating to the stock. We believe a low beta of 0.6, and
estimated CY12E FCF yield of c6% will further support valuations.
Risks to our price target
Key risks to our recommendation and price target are: (1) slowing down of
consumption; (2) significant raw material inflation; (3) aggressive competition; and
(4) the entry of new players in malted food drink space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Glaxosmithkline Consumer Healthcare Limited
Initiation ; Overweight ; GLSM.BO, SKB IN
Taller, Stronger and Sharper
• We initiate with an Overweight rating and a Dec-11 price target of
Rs2580, based on 1.5x PEG, in line with local peers (equivalent to 29x
CY11E and 25x CY12E EPS). Our PT implies potential upside of 23% from
current levels. GSK Consumer is the market leader in India’s malted food
drinks category with over 70% share, and enjoys strong brand equity with a
pan-India distribution network. It benefits from astute marketing and
innovation, which in our view should continue to support market share
gains and mix enhancements. We expect improving margins, strong free
cashflow and potentially higher dividend payout to support price
performance.
• Growth strategy based on nutrition, widening distribution reach, and
expanded product portfolio: We expect the company to deliver 21%
earnings growth over CY10-12E based on high growth prospects for the
processed foods category, a strong and differentiated product portfolio, and
favorable margin outlook. It is one of the few companies in the consumer
space that does not face significant competitive challenges. Diversification
of the product portfolio (towards high-growth segments like instant noodles,
biscuits & energy drinks), expanding direct distribution reach and rising
scale of modern retailing should support healthy sales growth.
• Margins to benefit from price hikes and moderation in A&P spend. We
expect margins to trend up despite high commodity prices owing to its high
pricing power and superior gross margin profile. Ad spend, currently at peak
levels of 16%, is likely to drop from CY11/12 as new products ramp up,
further supporting margin expansion.
• Improvement in return ratios; Use of cash will be crucial. We expect
better working capital efficiency and limited capex requirements to support
high FCF generation. GSK had cash and equivalents amounting to
Rs225/share (c10% of MCap) as of Dec’10. We believe an increase in the
dividend payout remains a strong possibility in coming years given the lack
of suitable inorganic growth opportunities in the domestic market.
Investment thesis
GlaxoSmithKline Consumer Healthcare (GSKCH) is an attractive play on fastgrowing processed foods market. Marked by low penetration levels and dominated
by unorganized players, we believe the Indian processed foods market holds
substantial potential for an organized player like GSK Consumer whose products
enjoy strong brand equity. GSKCH is the market leader in the malted beverages
category (market share of over 70% as of CY10) with brands such as Horlicks,
Boost, Maltova and Viva. Over the past 3-4 years company has taken a more
aggressive and innovative approach to diversify its product portfolio in order to meet
its target of doubling turnover in four years over 2007-11. Besides strong growth
potential in the malted beverage space, the company is aggressively leveraging on its
strong Horlicks brand to enter other processed food categories like Noodles, Biscuits
and nutritional bars. We expect more product introductions from the global portfolio
of the parent.
We initiate coverage on the company with an Overweight rating and Dec’11 target
price of Rs2580, implying 23% upside from current levels.
Investment Positives
Synonymous with malted beverages
GSK Consumer is the market leader in India’s malted beverage segment which is
estimated by the company to be worth Rs28bn. Its flagship brand Horlicks dominates
the category with 53% share and is arguably almost synonymous with health
beverages in the country. It is one of the very few brands in the country which has
enjoyed such high brand equity for several decades. The brand is strongly associated
with health and wellness led by scientific claim-driven advertising; in the annual
survey of India's Most Trusted Brands conducted by the Economic Times, Horlicks
was in the top 6 in 2009. Horlicks was at the top of the beverage category as India's
Most Trusted beverage brand.
We think the strength of Horlicks’ brand equity can be gauged from the fact that
other multinationals like Nestle India (Milo brand) and Hindustan Unilever (Amaze
brand) have been unsuccessful in penetrating the malted food segment despite
considerable investments. Dabur India's foray into this space with Chyawan Junior
has also met with a subdued consumer response.
GSK Consumer’s other leading brand Boost with 15% market share has grown
considerably in recent years posting 25% sales growth in CY10. This brand is
benefiting from growing peneration in northern and western parts of the country
where GSK Consumer has been traditionally weak in terms of distribution reach.
Attractive volume growth and pricing power
Over CY2006-10 GSKCH’s volume sales have grown at a CAGR of 12%
considerably ahead of 2% growth registered in previous five years (CY2001-06). The
acceleration in growth has primarily been driven by its aggressive approach towards
1) increasing penetration in north and west India (traditionally weak markets for
GSKCH) which have lower penetration of malted foods (10-15% vs 25% in the rest
of India), 2) Shift in usage of the product from being a milk substitute to milk
additive, 3) Various brand extensions (Women’s Horlicks, Horlicks Lite, Junior
Horlicks, Mothers Horlicks) which are growing sales at a faster pace (c25-30% over
CY10 and now contribute 18% of brand revenues), and 4) Growing distribution
reach (direct reach increased from 0.5mn outlets in CY09 to 0.66mn outlets in
CY10). Boost has particularly seen 25% increase in its distribution reach over last
one year.
We expect GSK Consumer to sustain 10-12% volume growth for the malted health
food drink product portfolio driven by 1) increased penetration of the products
(current penetration rates for malted foods is just c25% in the country), 2) higher
usage (to improve the purchase frequency of existing customers) aided by scientific
claims about nutritional benefits, 3) new variant launches, and 4) increasing
distribution reach.
While growth of the Horlicks brand is likely to be driven by category expansion
(two-thirds of growth comes from new users), Boost brand sales should benefit from
market share gains. For the other smaller MFD brands – Maltova and Viva – the
focus is to grow profitability more than the top line. Further, GSK is looking to get
more customers on board via enhanced product affordability. Introduction of low unit
packs (which currently account for c1.5% of turnover and growing upwards of
c30%) is a step in that direction and management is hopeful to increase their share
going forward.
GSKCH has been test marketing a low price malted beverage brand (Asha) in
Southern India priced at Rs85 (40% discount to Horlicks) for quite some time now.
However management noted that test market results are not yet positive for a
commercial launch. We believe cannibalization of the regular brand and potential
risk of lower margins are key impediments for wider distribution for this product.
With over 70% share in malted beverage segment, GSKCH holds good pricing
power and it has successfully undertaken 5-7% annual price hike over past four years
without affecting volume offtake. We expect pricing growth of 5-6% p.a. over the
next three years for the malted beverage portfolio of the company.
Diversifying product portfolio and step-up in product
innovation
GSK Consumer’s dependence on malted beverages remains quite high (95% revenue
contribution). In order to lower this dependence, the company is leveraging on the
strong brand equity of its Horlicks brand to other processed foods categories. It is
also looking to expand its product offering by introducing key brands from its global
portfolio. We expect these new launches will further add to strong growth seen in the
MFD category.
Its recent foray into the instant noodles segment under the brand Foodles has started
on a successful note. In a year of its launch it has captured 6% share in Southern and
Eastern India and on a pan India basis this brand now accounts for c3% share. The
company is currently in the process of expanding its reach in northern and western
India and has gone ahead with a nationwide TV campaign for the same. Management
has set some ambitious targets for this brand, aiming for 15% share over next three
years and increasing product reach from 0.2mn outlets currently to 0.5mn outlets
over similar period.
While the company has been present in the biscuits category (4% of sales), it has relaunched the Horlicks biscuit portfolio now and has introduced Rs5/10/15/20 price
points for the same. In order to enhance profitability for this segment, the company
has recently introduced premium SKUs like creams, cookies etc. GSK registered
over 30% sales growth for its biscuits portfolio in CY10 with Q4CY10 witnessing
very strong growth of 71% owing to recent launches of premium range of cookies,
creams and cereal based biscuits. We anticipate biscuits to register 20-25% growth
over the next three years supported by recent launches and extended distribution.
During 2009 the company launched Horlicks Nutribar, a high nutrition cereal bar
offered as a healthy snack between meals. It also launched premium protein
supplements – Acti-grow and Acti-base.
In order to widen its product offerings, GSK Consumer is also actively looking to
introduce global brands from the parent’s stable. It recently launched Lucozade
Sport, a sports drink, in the Indian market. Lucozade is already a well-established
sports drink brand in the UK and has presence in several other international markets
We expect its business auxiliary income to also be supported by new brands such as
Breathe Rite nasal strips and Sensodyne toothpaste, for which it receives commission
from the distribution for these products.
Upside to operating margins exists
During CY10 EBITDA margins for GSK Consumer expanded 10bp despite 50bp
decline in gross margins and A&P spend being the highest ever at 16.1% of sales.
Better SG&A leverage aided stable margins in CY10. We expect EBITDA margins
to move up during CY11 as Advertising & Promotion spend as % of sales
normalizes, with investments in new categories moderating. Further, we expect gross
margin pressure to be largely mitigated in coming quarters on account of recent price
hikes (5% price hike in Nov’10). Focus on cost management and better volume
leverage should further support margin expansion.
As scale for new products increases, A&P as % of sales will moderate and we
estimate this to decline from 16.1% in CY10 to 15.7% in CY12. We estimate 90bp
expansion in EBITDA margins over CY10-12E driven by lower A&P/Sales, better
SG&A leverage and price increases.
Investment Negatives/Risks
High dependence on a single category
Malted food accounted for nearly 95% of the company’s turnover in CY10 and such
high dependence on one category could constrain earnings growth. Other key players
in the processed food segment like Nestle India are well diversified and growth for
such companies is relatively more broad-based. However, over the past two years
GSKCH has made significant investments to expand its presence in non-malted food
segments. Growth in the biscuits portfolio has been strong, and the recent foray into
instant noodles has also met with good success so far. The company has also entered
into the niche nutritional bar segment, which is quite a nascent category in India. It is
also looking to introduce brands from GSK’s global portfolio in India (such as
recently launched sports drink Lucozade).
Competitive intensity in noodles and biscuits categories
remains stiff
Three-quarters of the Indian biscuits market is dominated by three players,
Britannia, Parle and ITC, and the extremely price sensitive nature of this segment
makes the competitive environment quite challenging. Price and product
segmentation is quite high in this category implying product differentiation is tough.
In order to compete effectively and gain share (we estimate GSK Consumer holds 1-
2% share in biscuits category), significant brand investments might be needed.
Looking to target a piece of the fast growing noodles market (sales estimated by
industry sources to be growing at 20-25% p.a.), GSK’s offering is in direct
competition with Nestle’s Maggi (with 85%+ share), HUL’s Knorr Soupy Noodles (a
recent entrant) and ITC’s Yippee Noodles (recent entrant).
Unlike MFD, pricing power in biscuits and noodles will be relatively lower for GSK
Consumer considering the well entrenched players in both these categories
Valuation and share price analysis
Share price performance
GSKCH’s consistent performance in terms of revenue and earnings growth makes us
confident about the company’s management and strategy for growth. Its performance
has been reflected in the recent upward share price run. The stock has run up by 16%
over the past six months, outperforming the Sensex by 15%. We expect the
outperformance to continue as earnings growth remains strong in coming quarters.
Key growth catalysts would be robust volume growth across high growth categories
(like malted foods, instant noodles and biscuits), supported by healthy margins and
continuous product innovation. Success of new products could further add to growth.
Comparable Valuations
GSKCH has historically traded at lower multiples and at a discount to mid cap
FMCG companies. This was on account of its lower ROEs due to lower dividend
payout. Over the past two years GSKCH’s P/E multiple has expanded substantially.
It is currently trading at 24x CY11 and 20x CY12 earnings estimates. When
compared to Nestle India, GSKCH is trading at a 25% discount on CY11/12
earnings.
The stock is trading at a discount of 10-20% compared with other domestic consumer
companies like HUL, Dabur, Colgate-Palmolive India and Nestle India on a PEG
basis. Compared with global food companies, GSK Consumer is trading at a discount
of 15-20% on a PEG basis.
Price target and recommendation
Valuations for GSK Consumer have moved up significantly since 2009 driven by the
company’s more aggressive approach towards product portfolio expansion along
with healthy volume and earnings growth trends. However, the stock has corrected
c10% YTD and we believe this provides a good entry opportunity. The stock
currently trades at 24x CY11 and 20x CY12 earnings estimate. We base our target
price on PEG of 1.5x which is in line with average PEG ratio for Indian consumer
staple companies. Our Dec-11 price target is Rs2580, implying CY11E and CY12E
P/E of 29x and 25x respectively, supported by an earnings CAGR forecast of 20%
over CY11-13E and strong volume growth and rising penetration of processed foods
in the country. We think GSK Consumer’s differentiated product portfolio combined
with strong brand equity should help the company to grow its share of the fast
growing convenience food and beverage space.
In our view, given that valuations look reasonable and the earnings growth outlook is
healthy, we expect the company to outperform the market and the staples space and
hence assign an Overweight rating to the stock. We believe a low beta of 0.6, and
estimated CY12E FCF yield of c6% will further support valuations.
Risks to our price target
Key risks to our recommendation and price target are: (1) slowing down of
consumption; (2) significant raw material inflation; (3) aggressive competition; and
(4) the entry of new players in malted food drink space.
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