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GSK Consumer is our preferred pick in packaged foods space. While the stock
has outperformed the broad market by 18% YTD, we still see scope for further
outperformance. With a strong and differentiated MFD product portfolio,
robust pricing power (amidst a relatively less competitive MFD space),
diversification of the product portfolio and expanding direct distribution
reach should support healthy growth for the company. We expect it to deliver
17% and 19% revenue and earnings CAGR over CY10-13E. GSK had cash
and equivalents amounting to Rs210/share (~10% of MCap) as of June’11.
Distribution/LUP gap with peers offers opportunity for growth. GSK’s
direct distribution reach (~0.65mn outlets) is far lower than that for other
FMCG players (~1mn+). Further contribution of affordable Low Unit Packs
(LUP) is among the lowest at ~2% for GSK within the FMCG space. A
large part of the distribution gap is in North & West India (currently ~15%
of revenues) which it is looking to address by stepping up
distribution/marketing initiatives in these regions. GSK’s focus on
enhancing its direct reach (to add 0.04-0.05mn outlets p.a.) and increasing
its share of LUPs (particularly in rural areas) could be key volume growth
drivers over the medium term, in our view.
New launches could add to upsides. GSK has been quite aggressive
regarding new product launches to diversify its revenue base. It has seen
mixed response to its new launches. While its foray into cereal bars and the
milk drinks segment have not met with much success, its attempts to build
scale in large and fast growing categories like biscuits and instant noodles
have been fairly successful. We estimate revenue CAGR of 31% for its non-
MFD portfolio over CY10-13E and its share to increase from 6.0% to 8.5%
over same period. Its distribution fee gains from the Sensodyne toothpaste
launch, recent premium launch of Horlicks Gold within the MFD space and
foray into the glucose segment should further support growth rates, in our
view.
Pricing power may help offset RM cost push; A&P/Sales should come
off peak levels. GSK undertook a 2.3% wtd. price increase in July’11,
which should help control gross margin erosion in coming quarters.
Furthermore, we believe the A&P/Sales ratio will likely moderate y/y during
2HCY11 as the base becomes challenging (17.6% in 2H CY10).
Key risks to our view are 1) any adverse impact of inflation on demand for
MFD products and 2) high commodity (milk) prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GSK Consumer is our preferred pick in packaged foods space. While the stock
has outperformed the broad market by 18% YTD, we still see scope for further
outperformance. With a strong and differentiated MFD product portfolio,
robust pricing power (amidst a relatively less competitive MFD space),
diversification of the product portfolio and expanding direct distribution
reach should support healthy growth for the company. We expect it to deliver
17% and 19% revenue and earnings CAGR over CY10-13E. GSK had cash
and equivalents amounting to Rs210/share (~10% of MCap) as of June’11.
Distribution/LUP gap with peers offers opportunity for growth. GSK’s
direct distribution reach (~0.65mn outlets) is far lower than that for other
FMCG players (~1mn+). Further contribution of affordable Low Unit Packs
(LUP) is among the lowest at ~2% for GSK within the FMCG space. A
large part of the distribution gap is in North & West India (currently ~15%
of revenues) which it is looking to address by stepping up
distribution/marketing initiatives in these regions. GSK’s focus on
enhancing its direct reach (to add 0.04-0.05mn outlets p.a.) and increasing
its share of LUPs (particularly in rural areas) could be key volume growth
drivers over the medium term, in our view.
New launches could add to upsides. GSK has been quite aggressive
regarding new product launches to diversify its revenue base. It has seen
mixed response to its new launches. While its foray into cereal bars and the
milk drinks segment have not met with much success, its attempts to build
scale in large and fast growing categories like biscuits and instant noodles
have been fairly successful. We estimate revenue CAGR of 31% for its non-
MFD portfolio over CY10-13E and its share to increase from 6.0% to 8.5%
over same period. Its distribution fee gains from the Sensodyne toothpaste
launch, recent premium launch of Horlicks Gold within the MFD space and
foray into the glucose segment should further support growth rates, in our
view.
Pricing power may help offset RM cost push; A&P/Sales should come
off peak levels. GSK undertook a 2.3% wtd. price increase in July’11,
which should help control gross margin erosion in coming quarters.
Furthermore, we believe the A&P/Sales ratio will likely moderate y/y during
2HCY11 as the base becomes challenging (17.6% in 2H CY10).
Key risks to our view are 1) any adverse impact of inflation on demand for
MFD products and 2) high commodity (milk) prices.
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