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Conference excerpts: GSK Consumer - Views on News from Equitymaster
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Conference excerpts: GSK Consumer
May 10, 2005

Malted beverage major, GSK Consumer, recently announced its 1QCY05 results and had arranged a conference call for the same. The following are the key excerpts from it.

What is 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’, which has led to the growth of this segment in India, contributes to around 80% of the company’s revenues. The company’s other brands include ‘Boost’, ‘Viva’ and ‘Maltova’. The company also earns 4% to 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’, ‘Iodex’ and ‘Crocin’ in its OTC portfolio.

Management view on 1QCY05 performance:
Malted beverage snapshot:  The company recorded growth across all brands. It’s key ‘Horlicks’ folio grew by 5% during 1QCY05 in value terms and around 2% in volume terms. It recently launched a new variant in Horlicks (Toffee flavour) and has received a positive response. As is known, the company has been introducing new variants and flavours in a bid to pep up growth. Boost grew by 15% in value and 2% in volume terms during the quarter followed by Viva and Maltova, which grew by 11% in value. It must be noted that while Maltova was relaunched in November last year, Viva was relaunched in February this year.

Biscuits:  The company’s biscuits folio also recorded an impressive performance during the quarter by clocking 22% YoY growth (value). But, this business segment currently forms a small portion of the overall revenues and the company is yet a small player in the segment.

Domestic outlook:  Over the next 3 quarters of CY05, the management expects high single-digit revenue growth to continue. Further, it is optimistic about new product launches, which will aid its performance. The company has also indicated that the buoyant double-digit performance of the biscuits business is likely to continue. GSK Consumer plans to launch new variants in key brands during the current year.

The company intends to continue focusing on category growth through product innovation, distribution and improving working capital efficiency. While its capacity utilisation was around 40% in its Sonepat plant, it has improved from the levels seen in CY04 (about 33%). The other two plants (Nabha and Raja), are running at around 65% utilisation which is likely to be maintained.

Further, the company has indicated that one of the key cost components, the advertising to sales ratio, which stood at 12% in 1QCY05, is likely to remain at the same levels in the current year. It must be noted that as per the company, the key reason for improved profitability during 1QCY05 was due to cost savings of around 13%, owing to lower milk prices, labour efficiency due to modernisation and mechanisation and overall raw material prices (33% of sales) being favourable. However, the prices of grains of wheat flour and barley were higher as compared to CY04.

As far as the company’s recent initiative is concerned, wherein it has installed 600 vending machines across the country for dispensing ready to drink malted beverages, the move has been quite successful as yet. The offtake (cups per day) has been on the rise since the initial launch of vending machines and the company foresees a huge growth opportunity in this business. But it must be noted that this business requires additional marketing effort.

Exports:  The company recently started exporting its products to Malaysia and Hong Kong in small quantities. However, the company does not foresee export sales as a big opportunity going forward.

Buyback:  The company successfully completed its buyback exercise, which was over subscribed 1.3 times. However, post this also, it is sitting on Rs 820 m cash, which it plans to invest in the development of its current brands.

Capex:  The company has indicated that it would be in the same order as in CY04 for CY05 and CY06.

What to expect?
At Rs 340, the stock trades at 14.6 times annualised 1QCY05 earnings and market cap to sales of 1.7x. The company's performance has no doubt been encouraging during the March quarter. The business restructuring and supply chain correction has paid off and that is good news. The stock is trading at a P/E of 11.8 times our CY07 earnings estimates.

In our view, the company will perform better in the coming quarters, as raw material prices are softening and key brands are exhibiting growth. This has reduced, to an extent, the company’s high dependence on ‘Horlicks’, its single largest brand.

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. Further, VAT remains a cause for concern, as is the same with other companies in the industry, due to certain uncertainties. Strikes and stock out’s are likely to occur with the implementation of the same because of traders not willing to take stock until further clarity emerges on various issues related to VAT. However, we continue to prefer Dabur, Pidilite and Essel Propack in the FMCG segment with a 2 to 3 year view.

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