GSK Consumer - Growth beyond Horlicks? - Ambit

GSK Consumer currently benefits from the strength of its Horlicks franchise in south and east India and from its capital-light auxiliary income stream. However, its milk food drinks (MFD) portfolio currently faces headwinds from growth moderation in the south and east market, given the high penetration levels and market share loss in the north and west (due to increased competitive intensity from Complan). Despite 23% CAGR in auxiliary income over CY12-15E, EPS CAGR over the same period is likely to be only 18%. We initiate coverage with a SELL stance and a target price of Rs. 3,945 (29% downside).

We expect EBITDA margin expansion of ~100bps over CY12-15 led by higher in-house manufacturing (after the recent capacity expansion), product mix change and the recent pricing action. However, we expect PAT CAGR to moderate from 22% over CY07-12 to 18% over CY12-15 due to:

Moderation in volume growth: GSK's MFD market share in south and east (S&E) India is around 74% vs around 30% in north and west (N&W) India. Over the past five years, it has lost market share to Complan and we expect this trend to continue due to: (a) high penetration levels of MFDs in S&E (50% currently) leading to moderation in category growth rates vs historical rates; (b) weak presence of Horlicks in the premium MFD segment where competitive intensity is rising (dominated by Abbott's Pediasure); (c) strong competition from Complan in N&W; and (d) the mass-market brand recall of Horlicks constraining a successful super-premium variant launch.

Risks around capital allocation: Over Rs. 10bn of surplus cash accumulated over the past five years will be used to fund portfolio diversification. Given the unsuccessful attempts at diversifying beyond the MFD segment in the past, this surplus capital would either remain unutilised over the next 2-3 years or be deployed towards M&A, which, given the current high valuations in the overall FMCG sector, is not likely to be significantly value accretive.

Potential of the auxiliary portfolio: We assume sales CAGR of 40% for Sensodyne and 22% for Eno over CY12-15 to drive 23% CAGR in auxiliary income for GSK Consumer over this period (vs 28% over CY09-12). Whilst this remains the biggest attraction for GSK's future growth potential, even a highly successful new launch is not likely to add more than 50bps to its revenue CAGR over the next three years.

Valuation: The stock's CY13E P/E multiple of 45.5x is at a 22% premium to its peers. Given the factors around moderating earnings growth, we find this premium to be unjustified. Our DCF-based valuation generates a TP of Rs. 3,945/share (29% downside), implying FY14 P/E multiple of 32.5x.

Source : Equity Bulls

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