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The leader is back with a healthy boost - Views on News from Equitymaster
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  • Jun 24, 2000

    The leader is back with a healthy boost

    "We are what we repeatedly do. Excellence, then, is not an act, but a habit." -Aristotle

    Who else but SmithKline Beecham Consumer Healthcare Ltd. (SBCH) could have maintained its leadership position even in the face of intense competition in the health food drink market. And there are several reasons for that.

    It is among the best-managed FMCG companies in India. Over the last ten years this market leader has gained in strength because of its constant innovations, a very efficient distribution network and prudent management practices.

    Competition in the market for malted beverages has failed to make a dent in SBCH’s market share. Despite high promotional activity the competitors ‘Bournvita’, ‘Milo’ and ‘Complan’ are not been able to eat into the market share enjoyed by ‘Horlicks’. The latest A&M – ORG – MARG annual survey of India’s best brands ranks Horlicks at 7th position as compared to 20th position in 1998. This reflects the unparalleled brand equity the brand commands.

    Horlicks building strength
    Brand Rank in 1999 Rank in 1998
    Horlicks 7 20
    Complan 37 50
    Bournvita 55 48

    The company after years of organic growth has opted for acquisitions to boost its market share. In the current year, it has acquired leading brands ‘Viva’ and ‘Maltova’ from Jagjit Industries Ltd. for a consideration of Rs 8.6 bn. These brands complement SBCH’s existing brand portfolio and will enable its to consolidate its presence in the health food drink segment by providing greater choice to customers. With the acquisition of these brands SBCH has also succeeded in preventing some other competitor from growing inorganically. It has enabled the company to enhance its market share, which came under threat due to rising competition. The company’s four brands viz. ‘Horlicks’, ‘Boost’, ‘Maltova’ and ‘Viva’ currently command an enviable 72% market share as compared to 3% of ‘Milo’ and 13% for ‘Bournvita’.

    However, the competition too seems to be gearing up for a fresh assault in the market. In recent times, Cadbury has rejuvenated its ‘Bournvita’ brand and plans to be more vigorous in its marketing efforts. Heinz, a relatively new entrant in the Indian market, is showing some signs of asserting itself and Nestle has identified beverages as its key growth driver. But considering the brand loyalty of ‘Horlicks’ and SBCH’s propensity for delivering value for money to consumers there is a little likelihood of competition taking a toll on SBCH. Nevertheless the increase in intensity of competition is coming at a time when SBCH is in the midst of a large capacity expansion plan. This combination could be quite lethal as it could affect the company’s future profitability. With cash profits of more than Rs 1 bn the company will not have problems in funding its expansion plans of Horlicks. But as it is been rightly said ‘Any change, even a change for the better, is always accompanied by drawbacks and discomforts’.

    The credibility of its existing brands, which are positioned as health and energy drinks, acts as an easy launch pad for new products in the foods market. The company has successfully launched a variety of brand extensions of its popular Horlicks brand such as ‘Mother Horlicks’, ‘Junior Horlicks‘ and ‘Horlicks Three-in-one’ sachets. SBCH is aiming to grow both organically and inorganically by exploiting existing opportunities supported by its well-established distribution network. Growing financial performance

    Year End Dec 31 (Rs m) FY97 FY98 FY99
    Sales 5,623 6,231 7,057
    Total Income 5,782 6,646 7,376
    Operating Profit 1,024 1,254 1,496
    Profit before tax 947 1,165 1,383
    Profit after tax 617 814 976

    Key Ratios      
    Operating profit margins 15.4% 13.5% 16.7%
    Net profit margins 10.7% 12.2% 13.2%
    Cash EPS (Rs) 15.3 19.9 24.0
    EPS (Rs) 13.6 17.9 21.5

    The sheen of the company has not been affected even in the time of slowdown in the economy and multiplying competition. It has reported excellent financial performance year over year. In the past 5 years, SBCH’s cash profits have grown at a CAGR of 28.2% while turnover witnessed a CAGR of 18.4%. The company’s profit margins are highest in the industry.

    At the current market price of Rs 346, the company is trading at a P/E of 16 times its FY00 earnings, which is the lowest in the past 4 years. The reasons for lower valuations are concerns about its parent’s 100% subsidiary. Furthermore the fact that its parent imposed a 3.5% royalty on sales for the use of its technology has not been well accepted by investors. The company will have to continuously launch the new products with innovative brand promotion exercise to keep its topline growing and then re-rating is on the cards.



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