The Hindu Business Line : GlaxoSmithKline : Buy

Strong growth prospects for the health drinks business and improving pricing power make GlaxoSmithkline Consumer Healthcare a good investment proposition for investors with a medium-term outlook. At its current price of Rs.577, the stock trades at a price-earnings multiple of about 18 times its trailing 12-month earnings and just about 16 times its likely FY07 earnings. This places the stock's valuation at a significant discount to other FMCG companies, which enjoy multiples of between 25 and 28 times forward earnings.

Sales growth for categories such as malted food drinks have accelerated to double digits in recent months, on the back of higher promotional activity, improving income levels and higher offtake of FMCGs from the non-urban centres. As the dominant player in the health drinks business (Cadbury India being the only competitor of note), GSK Consumer appears a direct beneficiary of this trend. Over the past year, the company has made packaging innovations in its flagship brand, Horlicks, and rolled out new ad campaigns for brown drinks - Boost and Maltova. The company has also acquired a significant presence in the out-of-home segment through its vending machines in schools, railway stations and other high traffic areas. Rising input costs have been a problem area for the company in the first nine months of 2006, with rising prices of milk, wheat and sugar. However, imminent increases in output of wheat and sugar this year could moderate input price pressures on these commodities in the months ahead. In any case, GSK Consumer reported a 19 per cent growth in earnings in the first nine months of 2006 despite the margin pressures. This was on top of a 46 per cent expansion in earnings the previous year.

On the flip side, with its presence restricted mainly to health drinks, GSK Consumer's product portfolio continues to be limited and would justify a valuation discount to other FMCG companies. However, the significant valuation gap with other FMCG majors and reasonable growth prospects still offer scope for a 15-20 per cent return on the stock price from current levels.