FMCG stocks have withstood the market fall better than others, but with the ongoing 'flight to safety' bidding up their prices, frontline stocks in the sector are now quite expensive in relation to the rest of the market. GlaxoSmithKline Consumer Healthcare — a mid-sized FMCG company — is an exception to this.
At the current market price of about Rs 545, the stock trades at a PE of just about 11 times its estimated earnings for CY2009, at a substantial discount to companies such as Dabur India and Nestle India. Investors can accumulate the stock.
Given the limited liquidity in the stock and the risk of further downside for the market, acquiring the stock in a phased manner is advisable.
The stock is well suited for an investor seeking a 15 per cent annual return with relatively low downside risk.
Extensions drive volumes
With a 70 per cent market share, GSK Consumer Healthcare dominates the nutritional drinks market with brands such as Horlicks, Boost, Viva and Maltova in its portfolio. Distribution of OTC brands such as Eno, Iodex and Crocin on behalf of a group company also brings in stable 'other income'.
Sales growth for the company, which hovered in the low double-digits until 2007, has seen a sharp acceleration this year.
Compared to a four-year annualised growth rate of about 16 per cent, net sales expanded at 23 per cent in the first half of 2008. This was aided both by healthy volume growth (about 13 per cent) as well as price increases (about 6-7 per cent).
Higher volume growth this year has been driven by product launches such as 'limited edition' variants for Boost, Actibase — a specialist nutritional supplement, and brand extensions for Horlicks such as Women's Horlicks and Horlicks Lite.
The company has continued to ramp up ad spend, while using celebrity endorsements to build its brands.
Limited down-trading risk
Volume growth may be sustained at higher levels over the next couple of years, given the clear consumer trend in favour of health and nutritional products, and efforts by the company to address a larger consumer base through extensions such as Horlicks Lite (targeted at adults) and Women's Horlicks.
The company's increased spending on brand-building (up from 9-10 per cent of sales to 12-13 per cent in recent quarters) and launch opportunities from its parent's portfolio, also hold promise for volume growth.
The potential to improve capacity utilisation from the current 75 per cent levels and plans to add capacities over the next three years at an investment of Rs 110 crore, may also help the company capitalise on strong offtake.
Despite price increases of 6-7 per cent last quarter, volume growth for the company is at relatively low risk from down-trading (companies moving to cheaper substitutes), given the company's dominant market shares, presence across price points with its four brands and few competing brands.
Input prices offer relief
While sales growth may remain healthy, the company's plan to increase brand-building spends was expected to lead to slower profit growth over the next couple of years.
In the June quarter, the company's 19 per cent sales growth translated into just a 9 per cent expansion in net profit, as escalating raw material costs and sharply higher ad spend (28 per cent increase against 19 per cent sales growth), impacted net profits.
However, on this count, a sharp correction in raw material prices, triggered by the commodity price meltdown since July and a benign outlook on input prices over the next few quarters, augur well for GSK consumer's margins.
Milk, malt extracts and wheat are the key inputs, and all three commodities have seen a correction in prices over the past few months.
Global milk powder prices have corrected over 30 per cent from their July peak, with a further softening of 16 per cent forecast for the next one year.
Wheat prices have also slumped sharply on expectations of a sharp increase in global output; domestic prices are expected to remain soft in the current year, on account of record production and a comfortable buffer stock. Malt prices are also off their earlier highs, though prices are expected to remain at the current levels over the next few months.
Though a depreciating rupee may offset some of the benefits from these falls, the correction in prices has still been steep enough to offer some cost savings.
In the light of the price increases already taken by the company, softer trends in input prices have the potential to expand operating profit margins for GSK Consumer in the quarters ahead. The resulting surpluses may also be used to finance promotional and brand-building spends, which will also help profit growth over the medium term.
At the current market price of about Rs 545, the stock trades at a PE of just about 11 times its estimated earnings for CY2009, at a substantial discount to companies such as Dabur India and Nestle India. Investors can accumulate the stock.
Given the limited liquidity in the stock and the risk of further downside for the market, acquiring the stock in a phased manner is advisable.
The stock is well suited for an investor seeking a 15 per cent annual return with relatively low downside risk.
Extensions drive volumes
With a 70 per cent market share, GSK Consumer Healthcare dominates the nutritional drinks market with brands such as Horlicks, Boost, Viva and Maltova in its portfolio. Distribution of OTC brands such as Eno, Iodex and Crocin on behalf of a group company also brings in stable 'other income'.
Sales growth for the company, which hovered in the low double-digits until 2007, has seen a sharp acceleration this year.
Compared to a four-year annualised growth rate of about 16 per cent, net sales expanded at 23 per cent in the first half of 2008. This was aided both by healthy volume growth (about 13 per cent) as well as price increases (about 6-7 per cent).
Higher volume growth this year has been driven by product launches such as 'limited edition' variants for Boost, Actibase — a specialist nutritional supplement, and brand extensions for Horlicks such as Women's Horlicks and Horlicks Lite.
The company has continued to ramp up ad spend, while using celebrity endorsements to build its brands.
Limited down-trading risk
Volume growth may be sustained at higher levels over the next couple of years, given the clear consumer trend in favour of health and nutritional products, and efforts by the company to address a larger consumer base through extensions such as Horlicks Lite (targeted at adults) and Women's Horlicks.
The company's increased spending on brand-building (up from 9-10 per cent of sales to 12-13 per cent in recent quarters) and launch opportunities from its parent's portfolio, also hold promise for volume growth.
The potential to improve capacity utilisation from the current 75 per cent levels and plans to add capacities over the next three years at an investment of Rs 110 crore, may also help the company capitalise on strong offtake.
Despite price increases of 6-7 per cent last quarter, volume growth for the company is at relatively low risk from down-trading (companies moving to cheaper substitutes), given the company's dominant market shares, presence across price points with its four brands and few competing brands.
Input prices offer relief
While sales growth may remain healthy, the company's plan to increase brand-building spends was expected to lead to slower profit growth over the next couple of years.
In the June quarter, the company's 19 per cent sales growth translated into just a 9 per cent expansion in net profit, as escalating raw material costs and sharply higher ad spend (28 per cent increase against 19 per cent sales growth), impacted net profits.
However, on this count, a sharp correction in raw material prices, triggered by the commodity price meltdown since July and a benign outlook on input prices over the next few quarters, augur well for GSK consumer's margins.
Milk, malt extracts and wheat are the key inputs, and all three commodities have seen a correction in prices over the past few months.
Global milk powder prices have corrected over 30 per cent from their July peak, with a further softening of 16 per cent forecast for the next one year.
Wheat prices have also slumped sharply on expectations of a sharp increase in global output; domestic prices are expected to remain soft in the current year, on account of record production and a comfortable buffer stock. Malt prices are also off their earlier highs, though prices are expected to remain at the current levels over the next few months.
Though a depreciating rupee may offset some of the benefits from these falls, the correction in prices has still been steep enough to offer some cost savings.
In the light of the price increases already taken by the company, softer trends in input prices have the potential to expand operating profit margins for GSK Consumer in the quarters ahead. The resulting surpluses may also be used to finance promotional and brand-building spends, which will also help profit growth over the medium term.
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