Glaxo SmithKline Consumer Healthcare (GSK Consumer) is an Indian associate of Glaxo SmithKline Plc. UK, (holds 43% equity stake). GSK Consumer is the largest player in health food drinks industry in India. Its brand portfolio includes super brands like Horlicks, Boosts and Maltova. The company enjoys market leadership in 90,000 Tonnes Indian malted milk food market.

Investment Positive:

Brand portfolio consists of ingrained brands:

Company’s brand portfolio includes ingrained brands like Horlicks (existing since 1930), Boost and Maltova. Horlicks enjoys more than 50% of Health Food Drink market. Boost has a market share of ~13% across the nation, while it commands a market share of 24% in southern part.

Ban on export of Skimmed Milk Powder (SMP) -Margin erosion may arrest

On 1st February 2007, the government announced ban on SMP exports till September 30, 2007 as part of its effort to curtail inflationary pressures in primary articles. The SMP price has increased by more than 30% as compared to last year. SMP is a key raw material and the closing of the export window may bring down domestic SMP prices and will help to arrest the margin erosion.

Rich Cash Flows:

For the year ended 2006 the company had cash & cash equivalents along with liquid investments stood at INR 2,676 million (i.e. INR 64/- per share). Besides this, its rich cash flow gives free cash flow yield of ~7%. Healthy cash position could help management to grow inorganically.

Attractive Valuation:

GSK Consumer currently trades at a PE multiple of 15X on CY2007E and at 12.4X on CY2008E, which looks attractive in consumer goods space. We initiate our coverage on GSK Consumer with BUY recommendation at target price of Rs 630 per share, based on 15x 2008(E) earnings. Our target price gives 23% upside and ~2.5% of dividend yield, resulting in total return of ~26%.