The Hindu Business Line : GlaxoSmithKline Consumer Healthcare: Buy

An investment can be considered in the GlaxoSmithKline Consumer Healthcare (GSK Consumer) stock. With a 70 per cent share in the health drinks segment, GSK Consumer — with Horlicks, Boost, Viva and Maltova brands — is well placed to capitalise on the increasing consumer spend on health and wellness. At 21 times its trailing four quarter per-share earnings, the stock trades at a substantial discount to other FMCG stocks, most of which trade at about 30-35 times the FY-06 per-share earnings. A narrow portfolio of products that is not nearly as exciting as high-growth categories such as hair colour or foods could explain GSK Consumer's lower valuations vis-à-vis its competitors.

But GSK Consumer has overhauled its brands and has over the past year been active in launching new variants to keep its market share. The strong revenue growth in the first quarter of calendar 2006 suggests that the company is well-poised to benefit from the uptrend in the FMCG sector.

Revenues get a boost

After a sedate performance in the last two years, GSK Consumer recorded an 11 per cent growth in revenues in CY-05. In the January-March quarter, revenues surged 24 per cent on the back of volume growth and a 2-3 per cent hike in prices. The company's efforts to rejuvenate its brands through new launches and higher ad spends also appear to have helped in shoring up revenues.

Over the past year, GSK Consumer has launched Horlicks Lite, as a malt-based drink and as a biscuit, aimed at diabetics and young adults; and an extra-chocolate variant Boost Chocoblast. In the OTC (over-the-counter) drug segment, it has launched Eno Pudina, which claims to have a cooling effect besides providing relief to acidity. Its Horlicks vending machines hold promise particularly in the office segment. It has, however, withdrawn its test marketing of Horlicks and Boost, citing lower margins as the reason.

New brands expand market

The new launches have met with success, backed by higher ad spends, which have been on the rise across the industry. Recently launched brands such as Amul Shakti and Britannia's Anlene in the milk segment and a host of fruit juices such as Real Activ compete for consumer mind space in the health-drinks segment.

Going by their distinct positioning and segmenting — Anlene, for instance, is targeted at people who are vulnerable to osteoporosis — these companies appear set on expanding the market for health drinks.

GSK Consumer, as the market leader, may be well placed to capture a greater share of the expanding market, even as it reinforces product attributes in its communications such as its "Taller, Sharper, Stronger" campaign for Horlicks.

If its efforts to consolidate its market share through new launches and higher ad spends pay off, the company could also succeed in passing on further hikes in input costs.

With prices of inputs such as malted barley and milk on the rise, GSK Consumer might have to hike prices further to preserve its 20 per cent operating margin.

Opportunities to cash in

While the initial success of recently launched variants inspires confidence, the substantial cash that remains at its disposal provides an additional cushion, given its history of buying back shares to reduce its equity base.

GSK Consumer has about Rs 200 crore in its kitty. This provides the company with the wherewithal to acquire brands to expand its portfolio.

The company has been silent on this front the last couple of years post its acquisition of Viva and Maltova. Such acquisition opportunities does not, however, appear to be on the horizon.

On the flip side, though, investors may be able to look forward to higher dividend payouts or further buy-backs, which could lend support to the stock price in a volatile market.

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