Glaxo SmithKline Consumer Healthcare - Key takeaways from management meet - Anand Rathi

We remain positive on growth prospects of GSK Consumer and expect its margin to expand due to premiumization and higher focus on health food/drinks segment. We expect issues in CSD and Sri Lanka to resolve by 1HCY13, getting their growth back on track. We retain a Buy, with a target of Rs.2,980.

Volume growth to be in high single digits. The company expects volume to grow a moderate 8-9%, led by Horlicks and Boost sales. Sales for these products, in turn, will be driven by the company's continued focus on small SKUs, new launches and expansion of distribution network. Issues in canteen, stores and department (CSD, 8% of net sales) will however continue even in 3QCY12 and will keep volumes subdued. Slowdown in exports to Sri Lanka (6% of sales) will also impact volumes.

Focus on premiumization driving margins. Focus on premium health food drink products such as Horlicks Gold, Womens Horlicks, Junior Horlicks, Mothers Horlicks as well as value added Foodles will drive realizations and margins upwards. Also, the company has hiked prices ~7% and could raise them another 200bps if required. Moreover, it has also entered into high-margin digestive and multi grain biscuits.

Higher focus on health food/drinks segment. The company has consciously reduced focus on older products such as Chill Dood, Nutribar and Lucozade. Instead, it intends to play on niche theme of healthy noodles for Foodles. Also, it sees strong growth potential in oats in South India.

Valuation. We value the stock at Rs.2,980 as per DCF-based valuation methodology and at our target price, the stock will trade at PE of 25x on CY12e and 22x CY13e earnings. Risks: Higher raw material prices and poorer response to launches.

Source : Equity Bulls

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