The Hindu Business Line : GlaxoSmithKline Consumer Healthcare: Hold

AFTER a prolonged lull in brand-building activity, GlaxoSmithKline Consumer unveiled a spate of brand extensions in recent months that have the potential to boost growth rates.

However, it may not be advisable to enter the stock at this juncture, as the valuation appears rich. At 22 times its trailing 12-month earnings, the stock trades at a price-earnings multiple that is comparable to frontline FMCG companies.

This is a trifle high, as the company's product portfolio is narrow compared to others in the FMCG space.

Shareholders can hold on to the stock, given that the company's growth rates seem set to head into a higher trajectory over a two/three-year time-frame.

GlaxoSmithKline Consumer has tended to report uneven sales growth from quarter to quarter, due to the seasonality of its business (monsoon months usually see brisk sales) and the rationalisation initiatives.

Over the past three quarters, sales growth rates have swung from 7 per cent in the first quarter to 15 per cent in the second, before slumping back to 9 per cent in the just-ended third quarter (the company's financial year coincides with the calendar).

Despite the uneven trend, these numbers suggest that the sales momentum is picking up, from the unspectacular single-digit growth rates seen last year.

The profit growth has kept well ahead of sales growth, recording a healthy 41 per cent increase over the nine-month period, on the back of lower raw material costs and cost-control measures.

On a booster

Over the past two quarters, there has been evidence of a broad-based revival in consumer spends on FMCGs. The health drinks category appears well-positioned to benefit from increased spends on health and wellness. As a market leader with a 70 per cent share of the health-drinks category, GlaxoSmithkline Consumer is likely to get a boost by this trend. The company, on its part, has also renewed brand-building efforts, which were flagging in 2003-04.

To start with, the Horlicks brand was reformulated and repackaged last July. The relaunch has contributed to better sales momentum for the brand. This was followed by the launch of the brown drinks brand — Boost — with an enhanced chocolate flavour. Over the past quarter, the company has extended the Horlicks brand into a new niche targeted at health-conscious adults.

Horlicks Lite, a new variant with low cholestrol and no added sugar, targets health-conscious adults and seems to have the potential to add substantially to the growth rates. The new brand may pep up usage by convalescents, already a big target group for Horlicks. The extension also exploits a new niche where other competing health drinks do not as yet have a presence. Maltova and Viva, the two health-drink brands acquired from Jagatjit Industries, too are set for a relaunch.

This may be important at a time when competitive pressure is building in the health-drinks market. Over the past few months, Nestle India's de-focus on Milo has been compensated by the entry of Amul into the health-drinks segment, with Amul Shakti. The Complan brand too has been resurrected in three new flavours.

Plenty of pluses

However, from a company perspective, several factors suggest a positive outlook. One, the profit margins, which were under pressure from rising input prices, could expand as input prices have softened in recent months. Stable milk prices (due to a good monsoon), combined with the supply-chain initiatives put in place by the company, could improve profit margins.

Second, most FMCG players are benefiting from better pricing power as consumers have absorbed higher selling prices without a murmur. Given its 70 per cent share of the health drinks market, GlaxoSmithkline is well-placed to effect price increases, if input prices inch up.

Third, the capacity utilisation level on the company's manufacturing facilities is in the 60-70 per cent range. The company, thus, has considerable room to ramp up output and sales revenues, without making additional investments. These could deliver double-digit earnings growth, without the risk of any earnings dilution from additional equity or debt.

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