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GSK Consumer: Conference call extracts - Views on News from Equitymaster
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GSK Consumer: Conference call extracts
Nov 24, 2006

GSK Consumers’ management held a conference call post the declaration of their 3QCY06 results to discuss the company’s performance and its growth prospects going forward. Here are the key takeaways from the call. About the company
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 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 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, and ‘Eno’, ‘Iodex’ and ‘Crocin’ in the OTC portfolio.

Topline strategy: GSK Consumer is the market leader in the health drink segment with around 70% share. Nearly 95% of the revenues in 3QCY06 were earned from Horlicks and Boost. In the third quarter, volume sales of Horlicks grew by 9% YoY, while that of Boost grew at 4% YoY. Biscuits too performed well with a 14% YoY growth. The company’s new products like Horlickslite, Complast, over the last two years, have contributed nearly 3% to the total sales. GSK is planning to launch new products in the next two years. Going forward, the management expects a double-digit growth in the topline.

Distribution and promotion: The company is currently strong in the Southern parts of India. It earns nearly 35% of its revenues from Bihar and Tamil Nadu combined. The company is now trying to increase its distribution reach across the northern and western regions. Sales from modern retail are currently less than 2%. Going forward, the management expects a strong triple digit growth in sales from this format (on the back of a lower base). Also its strategy of vending machines has proven to be successful, with the company now having 1,800 machines across the country. This has helped it increase its sales. The management also expects its advertising and R&D costs (as a % of sales) to go up in the coming quarters. This is in line with the company’s strategy to launch new products and gain more market share.

Input prices - a concern: The company expects the raw material prices to increase going forward. Milk prices have already risen by 20% and are expected to rise another 4% to 5% going forward. Though this is a cause for concern, GSK Consumer is in a position to increase the prices of its products. In June 2006, it had increased the prices of Boost and Horlicks by 2%. Going forward, to cushion the hike in the input prices, the company may increase the product prices. The management expects the PBT margins to stable at CY05 levels.

Capex: GSK Consumer has not planned any capex going forward. It currently uses 60% of its plant capacity. It must be noted that in the last five years, the company had successfully increased its capacity without making any big investments.

  3QCY05 4QCY05 1QCY06 2QCY06 3QCY06
Sales growth (YoY) 10.1% 14.7% 24.2% 10.7% 16.5%
OPM 20.8% 15.8% 20.9% 17.2% 17.5%
Net profit growth (YoY) 34.0% 71.3% 30.7% 6.3% 19.7%

What to expect?

At the current price of Rs 540, the stock is trading at a price to earnings multiple of 18.6 times its 12-month trailing earnings. Over the last few quarters, the company has witnessed strong growth in sales. The management is also investing in brand building and increasing its distribution network. This is expected to drive the growth going forward.

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