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GlaxoSmithkline Consumer (SKB)
Consumer products
Proposition-based products – the next growth driver. Variants-led growth in the
malted food drink (MFD) category could create value growth tailwinds as well as miximprovement-
led margin expansion opportunity for GSK. The launch of variants at
higher price points by Heinz (Complan ‘Nutri Gro’ and Complan ‘Memory’) and GSK
(‘Junior’, ‘Mother’, ‘Women’s’ Horlicks) is positive—variants’ unit prices are substantially
higher than the base products. We await consumer acceptance of the recently launched
‘Horlicks Gold’ (at a 28% premium) as its nutritional information seems to be not
materially different from the base variant, in our view. ADD. GSK remains our preferred
pick.
From core MFD to value-added MFD – creating new consumption opportunities
We see significant changes to the consumption patterns in MFD which has potential to continue
and could create growth tailwinds as well as mix-improvement-led margin expansion opportunity
for GSK.
Malted food drink (MFD) forms ~94% of the sales mix of the company, of which ~70% is
Horlicks and ~21% is Boost. Within Horlicks, ~70% constitutes basic Horlicks. While we expect
basic MFD to grow volumes at 12-15% per annum, given the penetration opportunity that the
category offers, MFD extensions will likely be the next growth driver.
Value-added offerings in the MFD category such as Junior Horlicks, Horlicks Lite, Mother
Horlicks etc. are showing strong double-digit growth, given the differentiated value proposition
that they offer to consumers. While it is still early days in the lifecycle of these products, we
believe that good performance of these products is a significant positive, as it demonstrates the
ability of the company to create demand and increase consumption points.
Realizations on MFD extensions (as these are proposition-based products) are superior to basic
Horlicks, hence margin accretive, e.g. Junior Horlicks is sold at 1.2X basic Horlicks and Mother
Horlicks and Women’s Horlicks is sold at 2.2X basic Horlicks. Hence sales cannibalization, if any,
is not a worry.
Apart from the Horlicks brand extensions targeting specific age-groups, GSK is currently
endeavoring to trade up the core Horlicks itself through the recently launched ’Horlicks
Gold‘ which is priced at Rs195 for 500 gm (versus Rs152 for the base variant). Exhibits 4, 5 and
6 give the pack-shots of base Horlicks, Horlicks Gold as well as the nutritional information of
base Horlicks and ‘Gold’ variant. We keenly await consumer acceptance of the product/market
feedback as the nutritional information of the ‘Gold’ variant (which is priced at a 28% premium)
seems to be not materially different from the base variant, in our view.
However, we highlight that competition in the value-added MFD category has increased
over the past year – (1) Heinz has launched Complan ‘Nutri Gro’ for 2-4 year old kids,
Complan ‘Memory’ for schoolchildren, (2) HUL has relaunched Amaze as Kissan ‘Nutri
smart’ targeting schoolchildren and is also positioned on the mental development
platform, (3) Abbott has increased activity-levels for PediaSure which is positioned as a
balanced nutritional product for children between 2 and 10 years.
In our view, given that the MFD category is still nascent with low penetration levels,
increase in number of players and product lines will help grow the category and GSK
being the market leader will likely benefit disproportionately. We highlight the 2/10 and
4/12 matrix that the company had presented in an analyst meet—2 out of 10 consumers
buy Horlicks and consume it in 4 out of 12 months.
MFD growth story intact, few factors to watch
Unlike its practice of taking one price hike in a year, in CY2010 the company took two
price hikes of 5% each (January 2010 and November 2010). Immediately after the second
price hike, volume growth in 1QCY11 dropped to 5% (against an average of 14% over
the past two years). In 2QCY11, volume growth bounced back to 16%. While we believe
that MFD is shifting from being a discretionary spend to a necessity, we would closely
watch for the impact of price hike on volume growth.
Over the past two years, the company’s adspends have increased to an average of 15%
from 12% prior to that. Most of the incremental brand spends were on new products, in
our view. While GSK has launched multiple new products such as Actibase, Actigrow,
Horlicks Chill Dood, Nutribar, cream biscuits, Foodles etc., our optimism has always been
on the potential of the malted food drink category (MFD). Most of its new launches
(other than in MFD) are likely witnessing signs of fatigue, in our view.
Retain ADD, GSK remains our preferred pick
We tweak our estimates (EPS for CY2011E and CY2012E higher by ~3%) as we model,
(1) higher capex as we expect GSK to enter a phase of capacity additions, (2) higher other
operating income (essentially distribution income received from GSK Asia for its products like
Sensodyne, Breathe Right etc.), (3) marginally lower adspends as many of the new launches
of CY2008-10 period have either been withdrawn from the shelves or facing stagnation, in
our view. Reiterate ADD rating and positive bias on GSK with a revised target price of
Rs2,900. Our revised EPS estimates are Rs83.2 and Rs104 for CY2011E and CY2012E,
respectively. Higher payout ratio is a key trigger to watch for. Key risks to our ADD rating are
input cost inflation and sustaining high food inflation impacting discretionary demand.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GlaxoSmithkline Consumer (SKB)
Consumer products
Proposition-based products – the next growth driver. Variants-led growth in the
malted food drink (MFD) category could create value growth tailwinds as well as miximprovement-
led margin expansion opportunity for GSK. The launch of variants at
higher price points by Heinz (Complan ‘Nutri Gro’ and Complan ‘Memory’) and GSK
(‘Junior’, ‘Mother’, ‘Women’s’ Horlicks) is positive—variants’ unit prices are substantially
higher than the base products. We await consumer acceptance of the recently launched
‘Horlicks Gold’ (at a 28% premium) as its nutritional information seems to be not
materially different from the base variant, in our view. ADD. GSK remains our preferred
pick.
From core MFD to value-added MFD – creating new consumption opportunities
We see significant changes to the consumption patterns in MFD which has potential to continue
and could create growth tailwinds as well as mix-improvement-led margin expansion opportunity
for GSK.
Malted food drink (MFD) forms ~94% of the sales mix of the company, of which ~70% is
Horlicks and ~21% is Boost. Within Horlicks, ~70% constitutes basic Horlicks. While we expect
basic MFD to grow volumes at 12-15% per annum, given the penetration opportunity that the
category offers, MFD extensions will likely be the next growth driver.
Value-added offerings in the MFD category such as Junior Horlicks, Horlicks Lite, Mother
Horlicks etc. are showing strong double-digit growth, given the differentiated value proposition
that they offer to consumers. While it is still early days in the lifecycle of these products, we
believe that good performance of these products is a significant positive, as it demonstrates the
ability of the company to create demand and increase consumption points.
Realizations on MFD extensions (as these are proposition-based products) are superior to basic
Horlicks, hence margin accretive, e.g. Junior Horlicks is sold at 1.2X basic Horlicks and Mother
Horlicks and Women’s Horlicks is sold at 2.2X basic Horlicks. Hence sales cannibalization, if any,
is not a worry.
Apart from the Horlicks brand extensions targeting specific age-groups, GSK is currently
endeavoring to trade up the core Horlicks itself through the recently launched ’Horlicks
Gold‘ which is priced at Rs195 for 500 gm (versus Rs152 for the base variant). Exhibits 4, 5 and
6 give the pack-shots of base Horlicks, Horlicks Gold as well as the nutritional information of
base Horlicks and ‘Gold’ variant. We keenly await consumer acceptance of the product/market
feedback as the nutritional information of the ‘Gold’ variant (which is priced at a 28% premium)
seems to be not materially different from the base variant, in our view.
However, we highlight that competition in the value-added MFD category has increased
over the past year – (1) Heinz has launched Complan ‘Nutri Gro’ for 2-4 year old kids,
Complan ‘Memory’ for schoolchildren, (2) HUL has relaunched Amaze as Kissan ‘Nutri
smart’ targeting schoolchildren and is also positioned on the mental development
platform, (3) Abbott has increased activity-levels for PediaSure which is positioned as a
balanced nutritional product for children between 2 and 10 years.
In our view, given that the MFD category is still nascent with low penetration levels,
increase in number of players and product lines will help grow the category and GSK
being the market leader will likely benefit disproportionately. We highlight the 2/10 and
4/12 matrix that the company had presented in an analyst meet—2 out of 10 consumers
buy Horlicks and consume it in 4 out of 12 months.
MFD growth story intact, few factors to watch
Unlike its practice of taking one price hike in a year, in CY2010 the company took two
price hikes of 5% each (January 2010 and November 2010). Immediately after the second
price hike, volume growth in 1QCY11 dropped to 5% (against an average of 14% over
the past two years). In 2QCY11, volume growth bounced back to 16%. While we believe
that MFD is shifting from being a discretionary spend to a necessity, we would closely
watch for the impact of price hike on volume growth.
Over the past two years, the company’s adspends have increased to an average of 15%
from 12% prior to that. Most of the incremental brand spends were on new products, in
our view. While GSK has launched multiple new products such as Actibase, Actigrow,
Horlicks Chill Dood, Nutribar, cream biscuits, Foodles etc., our optimism has always been
on the potential of the malted food drink category (MFD). Most of its new launches
(other than in MFD) are likely witnessing signs of fatigue, in our view.
Retain ADD, GSK remains our preferred pick
We tweak our estimates (EPS for CY2011E and CY2012E higher by ~3%) as we model,
(1) higher capex as we expect GSK to enter a phase of capacity additions, (2) higher other
operating income (essentially distribution income received from GSK Asia for its products like
Sensodyne, Breathe Right etc.), (3) marginally lower adspends as many of the new launches
of CY2008-10 period have either been withdrawn from the shelves or facing stagnation, in
our view. Reiterate ADD rating and positive bias on GSK with a revised target price of
Rs2,900. Our revised EPS estimates are Rs83.2 and Rs104 for CY2011E and CY2012E,
respectively. Higher payout ratio is a key trigger to watch for. Key risks to our ADD rating are
input cost inflation and sustaining high food inflation impacting discretionary demand.
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