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Monday, March 23, 2009

GSK Consumer Healthcare: A classic defensive stock

Scripscan:GSK Consumer Healthcare
Beta: 0.25
Institutional Holding: 29.5%
Dividend Yield: 2.5%
P/E: 13.42
M-Cap: Rs 2,526.7 cr
CMP: Rs 600.75

Introduction:The fast moving health goods (FMHG) is a rapidly growing product category and Glaxosmithkline Consumer Healthcare (GSKCH) is one of the leading contenders in this segment. Ranging from nutritional health drinks to over-the-counter medicinal products, the company has a product presence in various niche categories.New product launches and aggressive marketing are paving the way for the company’s growth. Being a multinational FMCG company, it is a classic defensive stock for a riskaverse investor.

Business:GSKCH is the Indian arm of the UK-based Glaxosmithkline, the world’s leading healthcare company. GSKCH is India’s largest player in health food drinks industry. With brands such as Horlicks, Boost, Viva and Maltova, the company commands a market share of 75% in its health drink market. The health and nutrition industry in India is worth Rs 3,000 crore and is growing at the rate of 14% per annum.Horlicks, GSKCH’s flagship product, is 100 years old and enjoys a dominant market share in the milk food drinks (MFD) category. The company also markets OTC drugs such as Eno, Crocin and Iodex, each of which has strong brand equity.

Growth Strategy:GSKCH aims to double its revenues in the next four years after having doubled its sales to current levels in the past 6 years. The recent product launches of Actigrow, a high-protein content baby food, Women’s Horlicks and the latest Horlicks Nutribar, a cereal bar, are likely to help the company in achieving its target. The company is also looking at launching a product in the MFD category in smaller SKUs to penetrate the rural markets.GSKCH’s net sales have risen at a compounded annual growth rate (CAGR) of 14.2% over the past five years to Rs 1542.8 crore in CY08. Its net profits have grown at a CAGR of 19.8% to Rs 188.3 crore in CY08. The company is debtfree, with a strong balance sheet and healthy cash flows. It has grown at a CAGR of 14.7% over the past five years, but the dividend growth has lagged behind the corresponding increase in net profits.The company has faced severe challenges on the cost front, with the prices of milk and other agro commodities on an uptrend. This has eaten into its profit margins since the past three quarters.The company has implemented cost-control measures to reduce input prices and undertaken price increases in January. As the pressure on commodity prices eases, the company is likely to gain further. While the profit margins have dropped, GSKCH continued its strong performance in 2008 by achieving high double-digit growth in sales and profits.During the quarter, Horlicks registered a volume growth of 16% yo-y, Boost clocked 10% and biscuits registered a 24% growth, higher than the category growth.

Valuations:The company has outperformed the Sensex and is valued at nearly double its annual turnover. It has witnessed steadily rising return on capital employed (ROCE) over the past five years. GSKCH is the most under-valued stock among the frontline FMCG companies. Investors looking at value buys in the defensive sectors can consider this scrip.

HEALTH WISE:-2007 was a year of landmarks, with the sales of Horlicks crossing the Rs 1,000 crore mark With brands such as Horlicks, Boost, Viva and Maltova, the company commands a 75% market share in its health drink market The company has faced severe challenges on the cost front, with the prices of milk and other agro commodities prices on an uptrend New product launches and aggressive marketing are paving the way for the company’s growth It also markets OTC drugs such as Eno, Crocin and Iodex, each of which has strong brand equity While the profit margins have dropped, GSKCH continued its strong performance in 2008 by achieving high double-digit growth in sales and profits The company’s success lies in its strong marketing and distribution network and a rich portfolio of products GSKCH is the most under valued stock among the frontline FMCG companies.
Source:Economictimes.

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