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India Equity Research Reports, IPO and Stock News
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From strength to strength
GSKCH’s undivided focus, positioning and investment on the
health platform are expected to offer benefits in near to long
term as these have contributed to the company’s re-rating in
the past couple of years. Entry into new high growth
categories along with maintaining volume growth in its core
HFD (health food drink) segment is expected to boost
profitability. Given the strong balance sheet, high free cash
flows along with increasing dividend payout & strong
earnings visibility GSKCH is one of our preferred bets in the
FMCG space. We initiate coverage with a BUY rating.
Leadership in HFD category: GSK consumer is undisputed
leader in the Rs35bn Indian HFD category having ~70%
market share across its brands, Horlicks, Boost, Viva and
Maltova. This segment accounts for 94% of the company’s
revenues and has grown at a strong 18.5% CAGR over CY07-
11 on the back of double digit volume growth.
Multiple drivers for volume growth: Over the last few years
the company has grown at a healthy volume growth above
9% coupled with 4-6% price increase. We expect the
company to achieve double digit volume growth on the back
of increase in penetration (currently only 22% pan India),
strong focus on variants (23% of sales in 2011 from 17% in
2007) and pricing (small SKUs contribute only ~4% of sales),
increase in distribution coupled with growing sales in North
and West India (10% of sales).
Diversification into new categories to boost growth: In
order to reduce its dependence on HFD category, the
company is focussing aggressively on new launches in the
non-HFD portfolio which has now become 7% of sales from
3% four years ago. It has made Horlicks the mother brand and
ventured into new product categories such as biscuits,
instant noodles, health bars, sports drinks and breakfast oats.
Growth rates and opportunity in these products are very high.
High earnings visibility: We expect the company to post
16.5% revenue CAGR over CY11-13E on the back of healthy
double digit volume growth. Despite challenges of increasing
A&P expenses and raw material cost inflation, it has been
able to maintain its margins in the ~15-17% range on the
back of constant price hikes coupled with operating leverage
in employee cost, manufacturing cost and selling &
distribution costs. Hence we expect profitability to grow at a
CAGR of 18.5% over CY11-13E.
Strong balance sheet: With negative working capital along
with low capex requirement (Rs3.5bn) over next couple of
years, the company has over Rs10.8bn in cash in CY11 which
is expected to increase to Rs14.4bn by CY13E translating into
cash of Rs343/share. We expect the company to steadily
increase its dividend payout which has been the case in the
past couple of years and in CY11 it was 41%.
Valuations: The stock is currently trading at 26.5x and 21.9x
CY12E and CY13E EPS of Rs98.2 and 118.5 respectively. We
value the stock at 25x FY13E EPS in-line with its 1- year
average multiple. We initiate coverage on the stock with a
BUY rating and target price of Rs2963 (14% upside).
Risks: i) Increase in raw material cost; ii) Competition getting
aggressive in the HFD segment and iii) Not being able to
scale up new launches.
Investment Rationale Profitability to grow at a CAGR of 18.5%
Leadership in HFD category: GSK consumer is undisputed leader in the
Rs35bn Indian HFD category having ~70% market share across its brands,
Horlicks, Boost, Viva and Maltova. We expect the company to achieve
double digit volume growth on the back of increase in penetration, strong
focus on variants, increase in distribution coupled with growing sales in
North and West India.
Diversification into new categories to boost growth: Company is
focussing aggressively on new launches in the non-HFD portfolio which
has now become 7% of sales from 3% four years ago. It has ventured into
new product categories such as biscuits, instant noodles, health bars,
sports drinks and breakfast oats.
High earnings visibility and strong balance sheet: We expect the
company to post 16.5% revenue CAGR over CY11-13E on the back of
healthy double digit volume growth. We believe the company will
maintain its margins in the ~15-17% range and help profitability to grow at
a CAGR of 18.5% over CY11-13E. With negative working capital along with
low capex requirement, the company has over Rs10.8bn in cash in CY11.
We expect the company to steadily increase its dividend payout as well.
Valuations
GSK with its near monopoly in the malted food drinks category, with a double digit volume growth
in this significantly under penetrated segment is expected to have revenue CAGR of 16.5% over
CY10-13E. Diversification into newer, high growth non-HFD products over the last couple of years is
expected to give a fillip to this growth in medium term. On the back of strong pricing power
coupled with cost saving exercises, we expect operating margins to remain in the 15.5-16.5% band
even though some of the new products have low margin profile and high advertising & promotion
expenses. We expect profitability to grow at CAGR of 18.5% over CY10-13E.
We believe the company’s focus; positioning and investment on the health platform are expected to
reap benefits in near to long term and has also contributed to the company’s re-rating in the past
couple of years. Given strong balance sheet, negative working capital, high free cash flows along
with increasing dividend payout & strong earnings visibility it makes it one of our preferred bets in
the FMCG space.
The stock is currently trading at 26.5x and 21.9x CY12E and CY13E EPS of Rs98.2 and 118.5
respectively. Company’s historic one year rolling average PE for 1 year, 3 years and 5 years has been
25x, 22x and 18x respectively. Its relative one year PE multiple premium to Sensex has been 60%
while the same for 3 years and 10 years is 25% and 15% respectively. We value the stock at 25x
FY13E EPS in-line with its 1- year average multiple and 20% discount to Nestle’s PE multiple. We
believe food companies are commanding premium valuations given their high growth in largely
under penetrated categories. GSK deserves a discount to Nestle given its high revenue
concentration from a single product while new categories are very niche. Hence we initiate
coverage on the stock with a BUY rating and target price of Rs2963 (14% upside).
Key risk to our call
Increase in raw material prices: Surge in raw material prices of milk, milk powder, wheat,
sugar, malted barley could significantly affect the company’s gross margins. To maintain
margins in the current scenario of inflation would be a challenge given that the A&P spend is
also at very high levels given the new product launches.
Competition getting aggressive: More than 94% of the revenues for the company are from
HFD category which is facing stiff competition from MNC and domestic companies. All these
companies are aggressively looking at this high growth category and with little differentiation
in products, volume growth could be under pressure if the A&P is reduced or competition gets
aggressive.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
From strength to strength
GSKCH’s undivided focus, positioning and investment on the
health platform are expected to offer benefits in near to long
term as these have contributed to the company’s re-rating in
the past couple of years. Entry into new high growth
categories along with maintaining volume growth in its core
HFD (health food drink) segment is expected to boost
profitability. Given the strong balance sheet, high free cash
flows along with increasing dividend payout & strong
earnings visibility GSKCH is one of our preferred bets in the
FMCG space. We initiate coverage with a BUY rating.
Leadership in HFD category: GSK consumer is undisputed
leader in the Rs35bn Indian HFD category having ~70%
market share across its brands, Horlicks, Boost, Viva and
Maltova. This segment accounts for 94% of the company’s
revenues and has grown at a strong 18.5% CAGR over CY07-
11 on the back of double digit volume growth.
Multiple drivers for volume growth: Over the last few years
the company has grown at a healthy volume growth above
9% coupled with 4-6% price increase. We expect the
company to achieve double digit volume growth on the back
of increase in penetration (currently only 22% pan India),
strong focus on variants (23% of sales in 2011 from 17% in
2007) and pricing (small SKUs contribute only ~4% of sales),
increase in distribution coupled with growing sales in North
and West India (10% of sales).
Diversification into new categories to boost growth: In
order to reduce its dependence on HFD category, the
company is focussing aggressively on new launches in the
non-HFD portfolio which has now become 7% of sales from
3% four years ago. It has made Horlicks the mother brand and
ventured into new product categories such as biscuits,
instant noodles, health bars, sports drinks and breakfast oats.
Growth rates and opportunity in these products are very high.
High earnings visibility: We expect the company to post
16.5% revenue CAGR over CY11-13E on the back of healthy
double digit volume growth. Despite challenges of increasing
A&P expenses and raw material cost inflation, it has been
able to maintain its margins in the ~15-17% range on the
back of constant price hikes coupled with operating leverage
in employee cost, manufacturing cost and selling &
distribution costs. Hence we expect profitability to grow at a
CAGR of 18.5% over CY11-13E.
Strong balance sheet: With negative working capital along
with low capex requirement (Rs3.5bn) over next couple of
years, the company has over Rs10.8bn in cash in CY11 which
is expected to increase to Rs14.4bn by CY13E translating into
cash of Rs343/share. We expect the company to steadily
increase its dividend payout which has been the case in the
past couple of years and in CY11 it was 41%.
Valuations: The stock is currently trading at 26.5x and 21.9x
CY12E and CY13E EPS of Rs98.2 and 118.5 respectively. We
value the stock at 25x FY13E EPS in-line with its 1- year
average multiple. We initiate coverage on the stock with a
BUY rating and target price of Rs2963 (14% upside).
Risks: i) Increase in raw material cost; ii) Competition getting
aggressive in the HFD segment and iii) Not being able to
scale up new launches.
Investment Rationale Profitability to grow at a CAGR of 18.5%
Leadership in HFD category: GSK consumer is undisputed leader in the
Rs35bn Indian HFD category having ~70% market share across its brands,
Horlicks, Boost, Viva and Maltova. We expect the company to achieve
double digit volume growth on the back of increase in penetration, strong
focus on variants, increase in distribution coupled with growing sales in
North and West India.
Diversification into new categories to boost growth: Company is
focussing aggressively on new launches in the non-HFD portfolio which
has now become 7% of sales from 3% four years ago. It has ventured into
new product categories such as biscuits, instant noodles, health bars,
sports drinks and breakfast oats.
High earnings visibility and strong balance sheet: We expect the
company to post 16.5% revenue CAGR over CY11-13E on the back of
healthy double digit volume growth. We believe the company will
maintain its margins in the ~15-17% range and help profitability to grow at
a CAGR of 18.5% over CY11-13E. With negative working capital along with
low capex requirement, the company has over Rs10.8bn in cash in CY11.
We expect the company to steadily increase its dividend payout as well.
Valuations
GSK with its near monopoly in the malted food drinks category, with a double digit volume growth
in this significantly under penetrated segment is expected to have revenue CAGR of 16.5% over
CY10-13E. Diversification into newer, high growth non-HFD products over the last couple of years is
expected to give a fillip to this growth in medium term. On the back of strong pricing power
coupled with cost saving exercises, we expect operating margins to remain in the 15.5-16.5% band
even though some of the new products have low margin profile and high advertising & promotion
expenses. We expect profitability to grow at CAGR of 18.5% over CY10-13E.
We believe the company’s focus; positioning and investment on the health platform are expected to
reap benefits in near to long term and has also contributed to the company’s re-rating in the past
couple of years. Given strong balance sheet, negative working capital, high free cash flows along
with increasing dividend payout & strong earnings visibility it makes it one of our preferred bets in
the FMCG space.
The stock is currently trading at 26.5x and 21.9x CY12E and CY13E EPS of Rs98.2 and 118.5
respectively. Company’s historic one year rolling average PE for 1 year, 3 years and 5 years has been
25x, 22x and 18x respectively. Its relative one year PE multiple premium to Sensex has been 60%
while the same for 3 years and 10 years is 25% and 15% respectively. We value the stock at 25x
FY13E EPS in-line with its 1- year average multiple and 20% discount to Nestle’s PE multiple. We
believe food companies are commanding premium valuations given their high growth in largely
under penetrated categories. GSK deserves a discount to Nestle given its high revenue
concentration from a single product while new categories are very niche. Hence we initiate
coverage on the stock with a BUY rating and target price of Rs2963 (14% upside).
Key risk to our call
Increase in raw material prices: Surge in raw material prices of milk, milk powder, wheat,
sugar, malted barley could significantly affect the company’s gross margins. To maintain
margins in the current scenario of inflation would be a challenge given that the A&P spend is
also at very high levels given the new product launches.
Competition getting aggressive: More than 94% of the revenues for the company are from
HFD category which is facing stiff competition from MNC and domestic companies. All these
companies are aggressively looking at this high growth category and with little differentiation
in products, volume growth could be under pressure if the A&P is reduced or competition gets
aggressive.
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