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GSK Cons: The One Product Wonder - Outside View

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GSK Cons: The One Product Wonder
May 3, 2010

Glaxo Smithkline Consumer Healthcare (GSKCH) is a one product wonder of sorts. It also boasts an impeccable balance sheet and in all probability the company faces a most promising future-if only it can continue to flog the brand equity of its product line at the same pace. It is also a classic illustration of a one product company which has been able to stand tall all these years-albeit in an ever growing market for its product. With increasing prosperity in the hinterland the brand has only one way to go. It is a plodder of sorts in a manner of speaking - after 51 years of operations it clocked a gross turnover of Rs 20 bn for the 12 months ended Dec 2009. Turnover growing from Rs 9 bn in the year 2000 to Rs 20 bn for the latest accounting year with net profit growing more slowly from Rs 1 bn to Rs 2 bn respectively. Net profit however took a beating between 2002 and 2004.Its fortunes in a sense are also inextricably tied to the success or failure of the monsoons.At least this is the conclusion from a reading of its past working results. It has chosen to partly tackle this problem by exporting to the immediate neighborhood, though its principal export markets are probably off its radar screen due to the parent's dictates.

Leaving out its few sidekick brands, Boost, Maltova and Viva, which are mere variations of its top selling brand, it is the top gun Horlicks brand that brings home the bacon at the end of the day. The Directors' report also chortles with delight the distinction that Brand Horlicks was top of the charts in the beverages category as India's most trusted beverages brand in 2009.

The company on its part stepped on the throttle and spent a cool Rs 3 bn plus on sustaining the brand in 2009 -up from the Rs 2 bn that it spent in the preceding year. That in a sense is one of the entry barriers that a prospective competitor will face if it seeks to challenge the company.It also has plenty of moolah to fight off the competition if you please.

The company also makes feeble attempts ever so often to increase its product range by leveraging the Horlicks brand as it did recently by launching biscuits, chocolates and now noodles --through third party manufacturing. But such a diversification may as usual may come to nought if the past is any indication.There is entrenched competition here you see.

It also says something of the quality of the Horlicks brand offering that no heavyweight FMCG company has been able to encroach on its territory - in the growing child nutrient segment. There is further proof of its hold in the market. It commands a stranglehold on the retail trade for its product range by literally selling cash down and in the process saving substantially on working capital costs.

The companies three plants are flogged close to capacity even after the recent capacity addition - but with no indication in the directors' report on its future course of action. Lots of platitudes about the performance but no direction. All the more perplexing, as the directors' report waxes eloquent on the future prospects of the food processing industry in India - to which category it belongs.

With the company generating ever increasing cash resources and with no 'safe' hideout to profitably park these funds, it boasted cash and bank balances of over Rs 8 bn at year end. The conservative board appears to have run out of ideas, apparently on the sage advice meted out by its parent board. If this trend continues 'other income' will in future add considerably to its bottomline. In the context of the surging cash balances, the company has paid Rs 43 m as interest expenses during the year which appears perplexing.

The only question mark appears to be the relatively high gross fixed asset base relative to its gross turnover. In 2009 the turnover generated was 3.4 times though considerably higher than the low of 1.7 times recorded in 2002. FMCG companies normally generate high turnover to gross block ratios due to the comparatively low outlay on capital equipment and the production volumes that it generates, but this could also be skewed because many FMCG cos outsource their products through third party manufacturing. GSKCH believes in making the 'high funda' mainline products that it sells.

The directors' report is about as bland as it can get, barring self congratulatory statements about the phenomenal success of its R&D dept in the company's outstanding performance. The biggest beneficiary of the Indian R&D's success is the parent which took home a cool Rs 700 m in royalty payments in 2009. Add to it the generous dividends (180% for the latest year) that the parent pockets from its 43% shareholding and the parent is a clear winner by a mile. Needless to add almost the entire paid up equity of Rs 420 m consists of bonus shares and, besides, the company is more than over-ripe for a most generous bonus issue given that it reserves and surplus is in excess of Rs 9 bn at year end.

With returns like this who needs diversification or expansion of any sorts? The Indian business must easily rank as the parent's most profitable investment anywhere - by a long mile at that.

The company however elicits very little interest in the secondary stockmarkets and it definitely could do with some PR help here. Its PE discounting is far lower than that of Nestle for example.

Disclosure: Please note that I am a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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