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Growing on malted strengths - Views on News from Equitymaster
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  • Jan 5, 2002

    Growing on malted strengths

    SmithKline Beecham Consumer Healthcare (SBCH) dominates the Rs 13 bn Indian malted beverage market with over 65% share. Its brand ‘Horlicks’ has led to growth of this sector in India. The company’s other brands include ‘Boost’, ‘Viva’ and ‘Maltova’. SBCH has a strong marketing and distribution network in India comprising over 1,600 wholesalers and direct coverage of over 400,000 retail outlets.

    Since 1990, SBCH has grown at an impressive CAGR of 21% both in terms of topline and bottomline. In a difficult year like 2001, SBCH has so far managed to record a 16% growth in topline and a 17% growth in bottomline. Moreover, the malted beverage penetration is still around 15%, which is a sign of immense potential for this market.

    (Rs m) 1990 2000 CAGR
    Sales 1,254 8,754 21.4%
    Net Profit 172 1,119 20.6%
    OPM 17.1% 18.3%  
    NPM 13.7% 12.8%  

    In the previous five years the company’s turnover has grown at a CAGR of 15% and net profits at a CAGR of 24%. These figures are by far among the best growth rates posted by an FMCG company. Its EPS has almost doubled in the last four years to Rs 24.7. Its exports accounted for around 4% of its FY01 sales.

    That SBCH is buoyant on India’s market potential is evident from the fact that it spent Rs 2.4 bn on a new plant (26,000 tonnes per annum) to manufacture Horlicks. The company has increased capacity at its existing plant by 6,000 tonnes per annum. Productivity level is expected to improve substantially, as the new plant is based on the latest available technology.

    Product Profile
    Product Brands Market size
    (Rs bn)
    % share Competition
    Horlicks, Boost,
    Maltova, Viva
    13 over 65% Cadbury's Bournvita, Nestle's Milo,
    Amul's Nutramul, Hienz's Complan

    Among the concerns is the fact that SBCH pays 4% of its revenues as a royalty to its parent company on sale of Horlicks. The parent has introduced all the new brands in India through its 100% subsidiary SmithKline Beecham Asia Pvt. Ltd. The subsidiary has well known brands like ‘Aquafresh’ in oral care segment, ‘Eno’ and ‘Crocin’ in the OTC pharma portfolio. SBCH receives only the marketing fees of around 5% for these products.

    However, the subsidiary concerns have been allayed to a certain extent, as the parent has not shown any lack of focus even post Glaxo’s worldwide merger with SmithKline. Among the recent developments, GlaxoSmithKline Pharmaceutical Limited has transferred the promotion, marketing and distribution activities of ‘Iodex’ range of products to SBCH with effect from January 2002. The ‘Iodex’ brand is estimated to have a turnover of about Rs 700 m. Taking an estimated 5% marketing fee, this is likely to add Rs 35 m to SBCH’s bottomline in 2002.

    The company seems likely to continue growing at historical rates, owing solely to its market dominance of India’s malted beverage market. The stock touched its 52 week high of Rs 448 in September first week and is currently trading at Rs 400. At the current price, the stock’s P/E rating stands at 14x FY02E earnings and market cap to sales ratio of 2x. The valuations are on the lower side of the FMCG spectrum owing to its subsidiary concerns. But even if the parent does not introduce new products through SBCH, the company already has a lot on its plate in terms of generating growth from malted drinks in India.



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