Reduce Glaxo Smithkline Consumer - Pure-Play on growth in MFD segment in India - Prabhudas Lilladher

GSK Consumer remains a pure-play on Rs40bn MFD (malted food drinks) segment in India; MFD accounts for 95% of sales. GSK has ~70% market share in MFD, with Horlicks and Boost as key brands in white and brown segments. Cadbury's Bournvita and Heinz's Complan are key competitors, with 15% and 13% market share. MFD category has seen unsuccessful entry of majors like Nestle (Milo), HUL (Kissan Amaze) and Dabur (Chyawan Junior) due to strong brand stickiness in high consumer involvement segment.

Innovations and functional products to drive 9% volume CAGR: GSK has launched Mothers Horlicks, Junior Horlicks, Women's Horlicks, Horlicks Lite and Horlicks Gold. These products priced at 15-30% premium have expanded the user base for MFD. We note that sales share of these innovations has increased to ~25% from 16% in five years. Growth opportunities abound, given infrequent incidence of purchase and less than 20% penetration in urban areas. Estimate 9% volume CAGR over CY12-14.

New launches have been a flop; focus back on wellness segment: GSK had done spate of launches like Foodles, cookies and creams in biscuits, Lucozade drink, Nutribar and RTD in Horlicks. Most of the products have flopped forcing GSK to focus on the wellness segment. It would be selling only multigrain variant in noodles and has launched Nutribic range of digestive and high fiber biscuits. Limited foods portfolio of Glaxo globally will limit non-MFD success and low hit rate.

Expensive, given 19% PAT CAGR and 50% incremental profit share from non-core business: GSK's income from mktg of OTC brands like ENO, Iodex, Sensodyne, Crocin etc. has been growing at 25% CAGR and accounts for ~15% of PBT. GSK's interest income has grown 3x in the past 3 yrs from Rs249m to Rs989m. We note that mktg and interest income has increased from 20% to 30% of PBT and has accounted for ~50% of PBT growth in the past two years. The stock is trading at 26.9xCY14 earnings, given 19% EPS CAGR & 30% share of PBT from interest and marketing income. 'Reduce'

Source : Equity Bulls

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