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MacVisit – GSK Consumer
A play on functional food growth
We highlight GSK Consumers (SKB IN, not rated), the largest malted food
drinks (MFD) player (~70% market share) in India, as a key play on very strong
consumer demand growth in nutritional and functional food given its strong
execution track record and strong brand equity. SKB’s sales and net profit have
grown at a CAGR of 20% and 24%, respectively, since CY06, led by low MFD
penetration (<25%).
Penetration-led growth to continue in MFD
GSK’s largest category is malted food drinks (MFD) and iconic brand Horlicks
contributes ~90% of its total sales. The category has been growing at ~19-20%
pa in recent years due to growing consumer demand for nutritional food. As
penetration-led growth in MFD is likely to continue, we think the threat to GSK’s
long-term growth in the MFD category is minimal due to its dominant market
share and less competition.
Leveraging brand Horlicks in MFD and other categories
In recent years, the company has successfully leveraged its Horlicks brand
through line extension such as Junior Horlicks, Women’s Horlicks, Horlicks Lite,
glucose biscuits and Horlicks Foodles. Although the base Horlicks brand still
contributes ~70% of GSK’s sales, different line extension of Horlicks now
contributes ~20% of its sales. GSK is now planning to launch breakfast cereals
and midday meals to continue to leverage its nutritional and health brand
Horlicks.
Focus on product diversification and innovation
In recent years, GSK has aggressively entered new categories such as instant
noodles (Foodles, Rs12bn market), glucose powder (Glaxose-D, Rs4.5bn
market), sports drinks (Lucozade), protein supplements (Actibase and Actigrow)
and meal snacks (Nutribar) to diversify into underpenetrated and high-growth
food categories. Some of the new launches such as Foodles have attained ~5-
6% market share less than a year after launch. With strong innovation support
from its global parent, GSK, the company has a number of new products in its
kitty and targets them to account for 25% of sales over the next five years.
Strong pricing power helps maintain margins
GSK has strong pricing power in Horlicks, aided by dominant market share and
low competitive intensity and it implemented a 10% price hike in CY10. GSK
has been able to maintain its EBITDA margin (16.2%) in CY10 despite raw
material cost pressure, unlike their peers.
Distribution and capacity expansion to meet growth target
GSK has increased its distribution reach to over 1.3m retail outlets (~50%
direct) to expand beyond South and East India (~85% of its current sales). Also,
GSK is planning to expand MFD capacity in Sonepat by 60% to meet future
demand. To help achieve medium-term growth target of ~20% sales and profit
growth, GSK is expanding its distribution and capacity along with new launches.
Trading at 27x CY11E EPS, 28% discount to Nestle India
SKB is currently trading at 27x and 22.6x to its CY11E and CY12E Bloomberg
consensus earnings, respectively, and at a ~28% discount to Nestle India
(NEST IN, NR).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MacVisit – GSK Consumer
A play on functional food growth
We highlight GSK Consumers (SKB IN, not rated), the largest malted food
drinks (MFD) player (~70% market share) in India, as a key play on very strong
consumer demand growth in nutritional and functional food given its strong
execution track record and strong brand equity. SKB’s sales and net profit have
grown at a CAGR of 20% and 24%, respectively, since CY06, led by low MFD
penetration (<25%).
Penetration-led growth to continue in MFD
GSK’s largest category is malted food drinks (MFD) and iconic brand Horlicks
contributes ~90% of its total sales. The category has been growing at ~19-20%
pa in recent years due to growing consumer demand for nutritional food. As
penetration-led growth in MFD is likely to continue, we think the threat to GSK’s
long-term growth in the MFD category is minimal due to its dominant market
share and less competition.
Leveraging brand Horlicks in MFD and other categories
In recent years, the company has successfully leveraged its Horlicks brand
through line extension such as Junior Horlicks, Women’s Horlicks, Horlicks Lite,
glucose biscuits and Horlicks Foodles. Although the base Horlicks brand still
contributes ~70% of GSK’s sales, different line extension of Horlicks now
contributes ~20% of its sales. GSK is now planning to launch breakfast cereals
and midday meals to continue to leverage its nutritional and health brand
Horlicks.
Focus on product diversification and innovation
In recent years, GSK has aggressively entered new categories such as instant
noodles (Foodles, Rs12bn market), glucose powder (Glaxose-D, Rs4.5bn
market), sports drinks (Lucozade), protein supplements (Actibase and Actigrow)
and meal snacks (Nutribar) to diversify into underpenetrated and high-growth
food categories. Some of the new launches such as Foodles have attained ~5-
6% market share less than a year after launch. With strong innovation support
from its global parent, GSK, the company has a number of new products in its
kitty and targets them to account for 25% of sales over the next five years.
Strong pricing power helps maintain margins
GSK has strong pricing power in Horlicks, aided by dominant market share and
low competitive intensity and it implemented a 10% price hike in CY10. GSK
has been able to maintain its EBITDA margin (16.2%) in CY10 despite raw
material cost pressure, unlike their peers.
Distribution and capacity expansion to meet growth target
GSK has increased its distribution reach to over 1.3m retail outlets (~50%
direct) to expand beyond South and East India (~85% of its current sales). Also,
GSK is planning to expand MFD capacity in Sonepat by 60% to meet future
demand. To help achieve medium-term growth target of ~20% sales and profit
growth, GSK is expanding its distribution and capacity along with new launches.
Trading at 27x CY11E EPS, 28% discount to Nestle India
SKB is currently trading at 27x and 22.6x to its CY11E and CY12E Bloomberg
consensus earnings, respectively, and at a ~28% discount to Nestle India
(NEST IN, NR).
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