GlaxoSmithKline Consumer: Volatile volume growth; Unsucessful new launches :: Motilal oswal,

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Volatile volume growth; Unsucessful new launches
Horlicks remains mainstay of SKB; "Best is yet to come"
 MFD, Health Foods to continue to be the cornerstone of SKB's strategy.
 SKB to consider further extending the Horlicks brand.
 New launches disappoint; SKB sees potential in parent's OTC products.
 SKB seems confident of sustaining 15% sales growth in MFD products,
pricing power strong.
We attended an analysts meet of GSK Consumer (SKB) at which Managing Director
Mr. Zubair Ahmed stated: "The best is yet to come", despite SKB being on the verge
of achieving its target of doubling sales and profits over the past four years (since
CY07). MFD (Malted Food Drinks) and health foods will continue to be the cornerstone
of SKB's strategy. SKB will also look at new launches in the foods space and at
marketing new OTC products from the parent's global portfolio. Key takeaways:
 SKB is set to achieve its target (set in CY07) of doubling sales and profits over
four years.
 SKB is very positive about growth prospects in the MFD segment as the product
penetration is hardly 22% (11% in rural India). SKB is uniquely positioned as it
has segmented the category with products catering to the youth, children, mothers
and women. Value-added variants comprise 16% of sales against 12% in 2007.
 SKB plans to make Horlicks a mega-brand with extensions across product
categories. SKB extended the Horlicks brand to biscuits, health bars, noodles
and now SKB has ventured into oats under this brand. SKB will consider extending
the brand further, provided it fits the science and wellness quotient.
 SKB markets OTC brands like Eno, Iodex, Crocin, Breathe Right and Sensodyne
from GSK Asia. Eno and Crocin are market leaders and Iodex ranks number two
in the segment. SKB believes its parent has products in the oral care segment
(Sensodyne variants and Aquafresh toothpaste), anti smoking segment and others
that can be marketed over time.
 New launches have shown mixed results. Foodles is back on the drawing board
for product re-configuration and Nutribar has been withdrawn. Biscuits have grown
38%, though on a low base. The share of non-MFD products in sales has increased
from 3% to 7% over the past four years. We are not convinced about the future of
Horlicks as a brand in product categories like noodles and biscuits. We believe
too much umbrella branding can backfire for a wellness brand like Horlicks.
 SKB seems confident of sustaining 15% sales growth in MFD products and higher
margins, led by operating leverage. SKB posted PAT of 23% CAGR over the past
five years. Pricing power remains strong as players like Nestle, Hindustan Unilever
and Dabur made unsuccessful attempts to enter the MFD segment.
 SKB has been re-rated over the past three years due to steadily increasing MFD
volume growth and intent to emerge as a multi-product company rather than an
MFD player. However, new launches have not met with much success. Besides
MFD volumes have been volatile over the past three quarters, being a discretionary
product in a high inflation environment. The stock trades at a PE of 29x CY11E
and 24x CY12E. Maintain Neutral.