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GSK Consumer: Over the years...

Apr 4, 2005

GSK Consumer is the market leader in the malted beverages segment with a dominating share of over 65% of the market valued at Rs 13 bn. It's product folio includes brands like 'Horlicks', 'Boost', 'Viva' and 'Maltova'. Let's look at the company's journey over the past 5 years.

GlaxoSmithKline Beecham Consumer Healthcare, is the leader of the malted beverages segment, with its brand 'Horlicks' accounting for nearly half of the malted beverage market. Its other key brand, 'Boost' accounts for about 10% share. Maltova and Viva together account for about 3% of the market. Glaxo's worldwide merger with SmithKline led to the company being rechristened from SmithKline Beecham Consumer Healthcare Ltd. to GSK Consumer Healthcare Limited.

The malted food beverage industry is popularly known as the health beverages sector. Historically, malted beverages have had a strong association with milk, which also explains its strong presence in the southern and eastern regions of the country. These regions suffered from milk deficit and malted beverages positioned themselves as substitutes for milk. The health food drink segment is classified into two categories - white liquid (Horlicks, Viva, Complan, Milo) and brown liquid (chocolate based drinks: Boost, Bournvita, Milo, Complan).

Over the years...
(Rs m) CY00 CY01 CY02 CY03 CY04UA CAGR
Net sales 7,528 8,599 7,530 7,991 8,622 3.5%
Other Income 155 170 192 248 255 13.3%
Expenditure 5,923 6,518 5,964 6,738 7,253 5.2%
EBIDT 1,604 2,081 1,566 1,253 1,369 -3.9%
Operating margin % 21.3% 24.2% 20.8% 15.7% 15.9% -7.1%
Net profit after Tax(Loss) 1,120 1,266 850 764 732 -10.1%

From the above table, we infer that GSK Consumer's growth has been sluggish at 3.5% CAGR of the past 5 years. Dependence on other income has increased, which grew at 13% in the period under review. Bottomline has actually shrunk over the past 5 years led by pruning of operating margins.

With no major competition, Horlicks rules South and East India. The skewed consumption pattern of the 40,000 tonnes per annum (tpa) Horlicks reflects this aspect as South and East account for 46% and 49%, respectively, of the total demand. But the situation is slowly changing. A combination of factors like increase in income levels, improved milk availability and aggressive promotions has seen sales of brown drinks going up in the South. The other major players in the malted beverage market are Nestle (Milo), Cadbury (Bourvita), Amul (Nutramul) and Heinz (Complan).

The acquisition of the two brands (Viva, Maltova) for a sum of Rs 863 m from Jagatjit Industries in 2000 has not been in line with the company's expectations. Both brands have in fact, together dropped market share from around 7% share at the time of acquisition, to under 3% currently.

Growth Prospects
The total market size is estimated to be 82,000 tonnes per annum of which about 65% consists of white beverages. The company has plans for Horlicks to go rural with a 100 gms pack which shows that the company is addressing the rural market in a focused way. The growth rates have been slow so far, hovering around 6% per annum, in terms of volume. However, all said and done, a malted drink is not on the priority list of a rural consumer since milk is his primary source of energy and changing his mindset is a mammoth task. Also, the image of the company has been that of an old man's drink which it is trying to change with the introduction of new variants of 'Horlicks'. Its latest offering is a 'Toffee' flavoured drink for its urban patrons.

The company has recently started to explore the 'Ready to Drink' format (vending machines) to grow its business. This business contributed only Rs 10 m to its revenues in CY04. However, the company has earmarked Rs 700 m for expansion of this format.

The company is a single product dominated company and has not exhibited great skill in launching and sustaining new products. 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. GSK receives only the marketing fees of around 5% for these products. Moreover, the parent does not have any significant interest in health beverages. The capacity utilisation levels of the company remain a cause of concern (currently 60%).

If looked closely, the company grew at a CAGR of 11%, 5 years prior to CY00 (i.e. between CY95 to CY99). The management anticipated that this growth would continue and hence it increased its capacity. Also, the company thought that it would become an outsourcing hub for the parent, which did not materialize, resulting in added interest burden, higher depreciation and idle capacity.

What to expect?
The stock is trading at Rs 345, reflecting a P/E of 12.3 times our CY07E earnings and market cap to sales of 1.7x. GSK Consumer has no doubt made some progress in reversing the decline in topline over the past few quarters. The company has also indicated the softening of raw material prices for 2005. We feel that with the introduction of VAT, the company's margins will increase further and with correction in its inventory and introduction of new products, the company is poised for growth. However, despite this, the company is not among our top picks from the FMCG sector, owing to its single product dependence.

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