Stock Analyst Choice

Fulfilling Nutri Needs

Though Glaxosmithkline’s valuations are expensive, the growing demand for healthy food will keep it in good shape

Glaxosmithkline Consumer Healthcare (GSKCH), in which the UK parent, GlaxoSmithKline, owns 43.16 per cent stake, is India’s leading health food drinks (HFD) manufacturer. In recent years the company has entered into non-malted food drink category with Foodles in instant noodles, Horlicks Nutribar in multi cereal bar and Lucozade as isotonic sports drink. Around 92 per cent of its revenue is derived domestically and the balance 8 per cent is contributed through exports. Out of that 92 per cent, a major chunk comes from the south region (46 per cent), next comes east with 36 per cent and the northern and western regions contribute 6 per cent and 4 per cent respectively. GSKCH has manufacturing facilities in Nabha (Punjab), Rajamundry (Andhra Pradesh) and Sonepat in Haryana.

The HFD category contributes around 94 per cent to the company’s revenue. This category has two variants: white with a dominant share of nearly 75 per cent and brown with around 25 per cent market share.
GSKCH dominates the domestic HFD segment with brands such as Horlics, Boost, Maltova and Viva which collectively command around 70 per cent market share. It has a near monopoly in white HFD with its Horlicks brand commanding a market share of nearly 54.5 per cent of the overall HFD market. However, in the brown HFD segment its brand Boost, which commands around 13 per cent market share, faces stiff competition from Cadbury’s Bournvita (around 16 per cent market share) and Heinz’s Complan (around 11 per cent market share).
* Its strong foothold in HFD segment has created a huge entry barrier for the big players such as Hindustan Unilever, Dabur and Nestle who tried their hands in this segment but had to recall their offerings due to market’s lukewarm response.
* GSKCH has retained its debt-free status since CY02. It has registered a decent growth of 12.3 per cent and around 11 per cent in its total income and profit after tax, respectively, over ten years. It is one of the strongest cash generating companies in FMCG space, registering a significant ten-year compounded annual growth rate (CAGR) of 28.3 per cent. GSKCH’s cash and bank balance currently stands at Rs 1,079.65 crore (CY11).
* GSKCH’s return ratios speak of its good health with return on capital employed (RoCE) standing tall by delivering above 20 per cent returns since CY94 and averaging 37.3 per cent over ten years. Its return on net worth averaged 24.4 per cent over the same period.

Growth drivers
As a part of its growth strategy, GSKCH is leveraging its Horlicks brand to fill various gaps by targeting specific consumer needs. The new variants Junior Horlicks, Mother Horlicks and Women’s Horlicks now contribute over 20 per cent to overall revenue.
The company is increasingly working towards reducing dependence on the HFD segment and strengthening its non-HFD portfolio. It has diversified into biscuits, noodles, oats, healthy snacking bars and energy drinks, which currently contribute around 6-7 per cent to the top line. According to analysts at Edelweiss, the company intends to increase this contribution up to 15 per cent over the next three to five years.
* GSKCH has a distribution alliance with GSK Asia (for Cricin and Eno) and GSK Pharma (for Iodex). The complete supply chain is handled by GSKCH for which it charges a commission of 16.7 per cent to GSK Asia and 10.5 per cent to GSK Pharma, adds the report. Revenue thus generated forms a part of its business auxiliary income contributing around 15 per cent to EBITDA. The auxiliary income from the over-the-counter (OTC) segment is expected to be robust on account of new launches.
* The malted health food drink segment is estimated to grow significantly on account of surging demand for healthy and nutritious food products. GSKCH’S lower penetration of around 22 per cent in the HFD segment with 11 per cent in rural India and 40 per cent plus in urban areas provides a significant demand upside.
* The rural per capita income has increased at a rate of 40 per cent over 2004-09 and GSKCH has been making efforts to tap this segment with various distribution initiatives and specialised packaging in smaller stock keeping units (SKUs).

GSKCH’s new launches over the last few years have been disappointing; the latest being the performance of Foodles and Lucozade followed by withdrawal of Chilled Doodh and Nutribar.
* Its dependence on agri-commodities is high. Raw-material expenses constitute around 31 per cent of the net sales. Further, milk and milk products form more than 50 per cent of the total raw material costs for the company and any increase in milk prices could impact its margins directly.
* The processed food sector is growing significantly and all multinational as well as domestic companies are aggressively innovating and enhancing their efforts, making competition stiffer.

Valuations The stock’s price-to-earnings ratio (PE) is currently trading at a very high premium of 31 per cent to its five-year median PE of 22.2. It’s trading at a discount of 35.4 per cent to Nestle’s PE multiple. Food companies are believed to command premium valuations given their high growth in largely under-penetrated categories. Based on five year earnings per share growth of 22.9 per cent, its price-to-earnings to growth ratio (PEG) comes at an unattractive level of 1.27.
The company’s broad product portfolio provides a good play on Indian processed food spending by virtue of its strong presence in under-penetrated and high-growth categories. Its focus, positioning and investment on the health platform will help it reap rich benefits in the long term. But currently its valuations are stretched, so wait till they reach comfortable levels.

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