GSK Consumer: Full of energy

At Rs 1,111, the GSK Consumer Healthcare stock may seem expensive at 20 times estimated 2009 earnings but it trades at a far more reasonable 17 times estimated 2010 earnings. The stock has gained more than 100 per cent since January this year, especially after the health beverages firm grew its net profit by 48 per cent in the March quarter. It is a good play on a young population, rising disposable incomes and increasing spends on nutrition.

Thanks to its strong brands, net sales were up a strong 25 per cent in the June 2009 quarter to Rs 376 crore. The 12 per cent growth in volumes was lower than the 20 per cent in the last five quarters but the company managed a price increase, which helped it negotiate a rise in the cost of some inputs. Despite a 250-basis-point rise in advertising spends, the operating profit margin expanded 140 basis points to 14.5 per cent, pushing up the operating profit by 36.6 per cent.

If the net profit grew just 19.6 per cent, it had more to do with a higher tax rate and lower other income. With a share of over 50 per cent of the Rs 2,300 crore malted beverages category, GSK Consumer is leveraging the flagship brand, Horlicks, to launch variants and enter new product categories, including biscuits for children, health snacks, chilled milk and protein supplements. That’s one reason for the increased ad spends.

The company is also trying to position Horlicks at lower price points so as to attract new consumers; last year, it launched Women’s Horlicks and Boost bites. New products contribute a very small portion to the total revenues and it could be a while before they contribute to the profits.