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Synonymous with malted beverages. 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.
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.
GSK Consumer (Overweight)
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, is supported by an earnings
CAGR forecast of 20% over CY11-13E and led by strong volume growth and rising
penetration of processed foods in the country.
Key risks to our recommendation and price target are: (1) slowdown in consumption;
(2) significant raw material inflation; (3) aggressive competition; and (4) the entry of
new players in the malted food drink space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Synonymous with malted beverages. 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.
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.
GSK Consumer (Overweight)
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, is supported by an earnings
CAGR forecast of 20% over CY11-13E and led by strong volume growth and rising
penetration of processed foods in the country.
Key risks to our recommendation and price target are: (1) slowdown in consumption;
(2) significant raw material inflation; (3) aggressive competition; and (4) the entry of
new players in the malted food drink space.
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