Glaxo buy: Deal valuation justified, but growth concerns remain

Anglo-Dutch FMCG giant Unilever said on Monday its Indian arm Hindustan Unilever Ltd (HUL) will acquire GlaxoSmithKline Consumer Healthcare Ltd (GSK Consumer) in an all-equity that that includes popular brands such as Horlicks and Boost.

GSK Consumer is a listed entity in India, and the ₹31,700-crore acquisition of the company by HUL is on par with its market value.

The valuations of most FMCG stocks have skyrocketed, given the boost in consumption seen in the last one-two years.

However, GSK Consumer is among the more reasonably valued stocks, trading at 36 times its trailing 12-month earnings. Big players in the FMCG space, such as HUL, Dabur and Godrej Consumer, trade at over 50-60 times.

But this does not imply that GSK Consumer has come cheap. The GSK-HUL deal is valued at around 7.5 times GSK Consumer’s revenue of ₹4,300 crore for 2017 -18.

The recent acquisition of Heinz brands, such as Complan , Glucon-D, Nycil and Sampriti, by Zydus Wellness, was valued only at four times the revenues of those brands.

Nevertheless, it is not an apple-for-apple comparison.

For one, malt-based drinks (predominantly Horlicks) bring at least 90 per cent of the revenues for GSK Consumer. Overall, including Boost and Maltova, GSK Consumer enjoys a 55-65 per cent share of the health drinks market. Of this, Horlicks alone boasts of a 40-50 per cent market share.

On the other hand, although Complan was Heinz’s flagship, accounting for about half its revenues, all the four brands that Zydus bought together earned revenues of just ₹1,150 crore. Besides, Complan’s market share of about 10 per cent is a far cry from Horlicks’ leadership position.

The acquisition will help HUL expand its revenues in the ‘food and refreshments’ segment.

For the year ended March 2018, that segment had brought in revenues of ₹6,400 crore for HUL. This represents just 20 per cent of HUL’s current revenues, with personal care and home care products taking the lead.

While personal care is HUL’s most profitable division, enjoying over 20 per cent operating margins, the foods segment is on par with home care, with operating margins in the mid-teens.

GSK Consumer’s operating margins are at around 18-20 per cent and hence, the buyout is not expected to be margin dilutive once the business is fully integrated.

Complementary products

The GSK Consumer brands will give HUL a foothold in a category of the food segment in which it is currently notpresent. HUL now has only tea (Lipton, 3 Roses etc), coffee (Bru), ice-cream (Kwality Wall’s), soup(Knorr) and jam (Kissan) in the food segment.

It can leverage its wide distribution network to improve the penetration of GSK Consumer brands in the northern and western parts of the country, as well as rural India — areas in which GSK Consumer hasn’t been able to make much headway.

Concerns remain

Horlicks, though, comes with some baggage.

Growth in the health drinks category has slowed in recent times. As per HUL’s own disclosure, the category has seen only 6 per cent growth annually in 2014-17, against the 16 per cent annual growth seen in 2009-14.

Growing awareness about sugar levels in health drinks and the catching on of lactose-free products are beginning to push consumers away from traditional health foods such as Horlicks. HUL will have its task cut out in making the decades-old brand relevant to the current generation.

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