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Key points
Market leader in MFD segment: GlaxoSmithKline Consumer Healthcare (GSK) is a
leader in the malted food drink (MFD) market with a market share of 71%. The MFD
business accounts for around 94% of its overall domestic revenues. Over the years
GSK has developed strong brands, such as Horlicks (a 55% market share) and Boost
(a 13% market share), which are household names today. Judicious new launches
and brand extensions to meet the consumer’s needs and the expansion of its
distribution reach have helped GSK to stay ahead of the competition and maintain
its pricing power over the years.
Double-digit volume growth in MFDs sustainable in the long run: The penetration
of MFDs is low (22% overall) compared with some of the other consumer goods in
India. With the rising per capita income and increased acceptance of health and
wellness products, the demand for MFDs would increase in the years ahead. Hence,
on the back of improved penetration (both rural and urban), increasing distribution
reach, and sustained innovations and brand extensions GSK’s volumes are expected
to grow by 11-14% in the MFD segment in the long run.
Entering into new categories: Leveraging the strong brand equity of Horlicks and
‘‘supplementing the brand with consumer insights’’, GSK has entered into newer
categories, such as biscuits, noodles, energy bars, sports drinks, health supplements
and oats, in recent years. While its biscuit segment grew at a CAGR of 30% over
CY2007-10, the noodle segment gained a market share of 3% at an all-India level.
The low penetration of some of the categories, such as noodles, oats, health
supplements and energy drinks, provides strong visibility of future growth.
Strong balance sheet: GSK is debt-free and has been consistently enhancing its
cash balance over the years. Its cash balance currently stands at close to Rs1,000
crore and is expected to improve to around Rs1,170 crore in CY2012. The strong
cash generation ability would take care of its future capex needs. GSK is known as
a very good dividend payer. Over CY2005-09 its average dividend pay-out stood at
33% (CY2010 was an exception with a dividend of 70%).
Outlook and valuation: With a double-digit volume growth in the MFD segment and
a strong growth in the newly launched products, we expect GSK’s top line to grow at
a CAGR of 19.2% over CY2010-13. The strong pricing power would help it to maintain
the OPM at 16-17% over the same period. Hence, we expect GSK’s bottom line to
grow at a CAGR of 19.0% over CY2010-13. We initiate coverage on GSK with a Buy
recommendation. Our price target for GSK is Rs3,000 based on 25x its CY2013E EPS
of Rs120.3, which is a 25% discount to Nestle India’s current multiple. The fair value
as per the DCF method comes to Rs3,069. At the current market price the stock
trades at 25.1x its CY2012E EPS of Rs101.3 and 21.2x its CY2013E EPS of Rs120.1.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key points
Market leader in MFD segment: GlaxoSmithKline Consumer Healthcare (GSK) is a
leader in the malted food drink (MFD) market with a market share of 71%. The MFD
business accounts for around 94% of its overall domestic revenues. Over the years
GSK has developed strong brands, such as Horlicks (a 55% market share) and Boost
(a 13% market share), which are household names today. Judicious new launches
and brand extensions to meet the consumer’s needs and the expansion of its
distribution reach have helped GSK to stay ahead of the competition and maintain
its pricing power over the years.
Double-digit volume growth in MFDs sustainable in the long run: The penetration
of MFDs is low (22% overall) compared with some of the other consumer goods in
India. With the rising per capita income and increased acceptance of health and
wellness products, the demand for MFDs would increase in the years ahead. Hence,
on the back of improved penetration (both rural and urban), increasing distribution
reach, and sustained innovations and brand extensions GSK’s volumes are expected
to grow by 11-14% in the MFD segment in the long run.
Entering into new categories: Leveraging the strong brand equity of Horlicks and
‘‘supplementing the brand with consumer insights’’, GSK has entered into newer
categories, such as biscuits, noodles, energy bars, sports drinks, health supplements
and oats, in recent years. While its biscuit segment grew at a CAGR of 30% over
CY2007-10, the noodle segment gained a market share of 3% at an all-India level.
The low penetration of some of the categories, such as noodles, oats, health
supplements and energy drinks, provides strong visibility of future growth.
Strong balance sheet: GSK is debt-free and has been consistently enhancing its
cash balance over the years. Its cash balance currently stands at close to Rs1,000
crore and is expected to improve to around Rs1,170 crore in CY2012. The strong
cash generation ability would take care of its future capex needs. GSK is known as
a very good dividend payer. Over CY2005-09 its average dividend pay-out stood at
33% (CY2010 was an exception with a dividend of 70%).
Outlook and valuation: With a double-digit volume growth in the MFD segment and
a strong growth in the newly launched products, we expect GSK’s top line to grow at
a CAGR of 19.2% over CY2010-13. The strong pricing power would help it to maintain
the OPM at 16-17% over the same period. Hence, we expect GSK’s bottom line to
grow at a CAGR of 19.0% over CY2010-13. We initiate coverage on GSK with a Buy
recommendation. Our price target for GSK is Rs3,000 based on 25x its CY2013E EPS
of Rs120.3, which is a 25% discount to Nestle India’s current multiple. The fair value
as per the DCF method comes to Rs3,069. At the current market price the stock
trades at 25.1x its CY2012E EPS of Rs101.3 and 21.2x its CY2013E EPS of Rs120.1.
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