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Stock pick from the healthcare sector

| 1/13/2012 12:47 PM Friday

There are very few companies that perform well not only during good times but also with equal ease during the difficult phases. While a majority of the Indian stock indices fell by more than 20 per cent in 2011, GSK Consumer Healthcare (GSK) surged by 10 per cent during the same period. The reason for the company’s outperformance is its consistently good financial posting over the past several years. Having performed well on the financial front, it has also seen higher dividend payouts, which have increased substantially in the last three years. Last year, the company paid a dividend of Rs 50 per share.

There are other compelling factors too that go in favour of this stock. It has a leadership position in the malted food drink (MFD) market with a 71 per cent market share, and sustainable double-digit volume growth is expected over the long term too. Further, the company’s entry into new categories indicates the de-risking of its business model. It is a debt-free company, with around Rs 950 crore of cash in its kitty. On the valuations front, the scrip is available at 28.90x. This may seem to be on the higher side, but remember that consistency and leadership are highly rated on the stock market.

GSK’s MFD business accounts for around 94 per cent of its overall domestic revenues. Its strong brands such as Horlicks (55 per cent market share) and Boost, along with Maltova (16 per cent market share), are household names today. The launch of several variants under the Horlicks brand has helped it maintain its leadership position and keep its pricing power intact.

In the past, volume growth in the MDF segment has been good at more than 15 per cent, and is expected to be sustained in the long term. In 9M CY11 (the company closes its books in December every year), volume growth has been more than 10 per cent despite inflationary pressures. This pace of growth is expected to be retained on account of various factors. First, at 22 per cent (45 per cent in urban and 11 per cent in rural areas), the penetration level of MFD has been very low. With the income levels improving in the rural areas, and increased awareness about health products, the penetration level in such regions is expected to grow.

The company has launched a variant of Horlicks named Asha at a 40 per cent discount to the price of the normal brand. This has been launched for rural areas, and is currently being test marketed. Further, it is planning to enhance its reach by adding one lakh outlets every year (it currently has seven lakh direct outlets), which would help to enhance the penetration levels further. The new categories of products (which bring in around six per cent of revenues) like biscuits, noodles and sports drinks are also expected to drive growth. The management claims that Horlicks Foodles and Boost Glucose have found good acceptance in the domestic market, with Horlicks Foodles already commanding a three per cent market share.

As mentioned earlier, the company has been able to maintain its pricing power, and has managed to maintain the operating profit margin (OPM) at 16 per cent despite the rising raw material prices. It has been able to carry forward the momentum in its strong financial performance to 9M CY11 too, where the topline at Rs 2145.89 crore and bottomline at Rs 296.11 crore were up, as against Rs 1849.56 crore and Rs 246.48 crore in 9M CY10. With expectations of good volume growth and sustainable margins, we recommend that investors should buy the scrip with a one-year perspective for about 15-20 per cent capital appreciation.

GSK Consumer Health Sep ' 11 Jun ' 11 Mar ' 11 Dec ' 10 Sep ' 10
Sales 744.6 673.87 727.42 524.19 633.02
Other Income 23.11 15.48 16.58 16.71 12.96
Operating Profit 142.53 119.03 162.7 74.85 115.51
Interest 1.03 0.9 0.66 0.68 0.73
Depreciation 11.65 11.31 10.93 10.9 9.96
Net Profit / Loss 103.03 82.46 110.62 53.37 78.57
Equity Capital 42.06 42.06 42.06 42.06 42.06

Share Holding Pattern as on :  30/09/2011
Foreign Promoters 43.16
Mutual Funds and UTI 6.74
Banks Fin. Inst. and Insurance 9.81
FIIs 14.15
Private Corporate Bodies 10.67
General Public 15.47
GRAND TOTAL 100


Best Of Last One Year 

Price (Rs) CMP(Rs)  
Company Name Reco.  10/1/2012 Gain%
Balkrishna Industries  114.30 161.00 40.86
Indraprastha Gas  327.65 380.00 15.98
Bosch 6269 7090.00 13.10
HDFC  621.00 682.00 9.82
Nestle India 3746.85 4102.00 9.48
Havells India  386.60 419.00 8.38

 

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