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GSK Consumer: Analyst conference excerpts - Views on News from Equitymaster
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GSK Consumer: Analyst conference excerpts
Mar 29, 2005

Malted beverage major, GSK Consumer, has had a good run on the stock exchanges, gaining nearly 50% over the past year. This would seem surprising, considering that the company’s CY04 performance left much to be desired. Though revenues for the year were up 8%, profits were down 4%. However, the strength in the stock seems to be coming from what the management expects in CY05 and beyond. The company held a conference recently. The following are the key excerpts from the same.

What’s the company’s business?
GSK Consumer dominates the Rs 13 bn Indian malted beverage market with a significant 65% share (volume terms). Its white beverage brand ‘Horlicks’ has led to the market growth of this sector in India and contributes around 80% to the company’s revenues. The company’s other brands include ‘Boost’, ‘Viva’ and ‘Maltova’. The company also earns 4-5% fees by marketing products for SmithKline Beecham Asia Pvt. Ltd, the parent’s 100% subsidiary. The subsidiary has well known brands like ‘Aquafresh’ in oral care segment, ‘Eno’ and ‘Crocin’ in OTC portfolio. It recently also took up marketing of ‘Iodex’ for GSK Pharma.

Management view on highlights of CY04 performance

Malted beverage snapshot:  The management indicated that the company’s key ‘Horlicks’ folio grew by 6.2% during CY04 (both in volume and value terms). Of this, the company’s newly introduced sub-brands clocked a faster growth. As is known, the company has been introducing new variants and flavours in a bid to pep up growth. The ‘Mother’s Horlicks’ variant grew by 24% YoY, while ‘Chocolate Horlicks’ grew by 29% during CY04. ‘Junior Horlicks’ too was up 8% during the year. As for ‘Boost’, it too grew by a steady 12% (both in volume and value).

Biscuits:  The company’s biscuits folio was also a key contributor to overall growth, clocking 17% YoY growth. But it still forms only 4% of the company’s total revenues.

Outlook:  The management has indicated that it expects revenues in CY05 to clock a higher single digit growth. In effect, it believes that the new mix of ‘Horlicks’ folio is likely to continue its growth momentum. The company has also indicated that the buoyant double-digit performance of the biscuit business is likely to continue.

The company’s focus will continue on product innovation, distribution and improving working capital efficiency. The company’s inventory days were down to 7-15 days at the retail level and 3 days at the company level. While the company’s capacity utilisation was 60% in CY04, the same is likely to be in the range of 63% to 64% in CY05. A key component of costs, the advertising to sales ratio, which stood at 12% in CY04, is likely to remain the same or may be a little higher than in CY05.

Backed by the above, the management expects operating margins to improve sharply in CY05. If the VAT comes fully in force, then the company will be among the key beneficiaries as sales tax for the company in CY04 stood at 15%.

The company is also focusing on the ‘Ready to Drink’ format (vending machines). Revenues from this initiative were Rs 10 m in CY04. The company has earmarked a capex of Rs 70 m for developing this business.

What to expect?
At the current price of Rs 343, the stock trades at a price to earnings multiple of 16 times our CY05 expected earnings and market capitalisation to sales of 1.5 times. We expect the company to clock a 23% profit growth during CY05. The company will also get an earnings fillip owing to the share buyback, which as per our estimates, will result in reduction of equity shares (approximately 3.6 m shares bought back).

Despite this, GSK Consumer is still not among our top picks from the FMCG sector, owing to its single product dependence. The competition in this segment is increasing with new players entering, as well as increasing availability of imported goods atleast in the metros’. We continue to prefer Dabur, Pidilite and Essel Propack with a 2 to 3 year view.

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