Stock Review: GlaxoSmithKline

GlaxoSmithKline Consumer Healthcare's brand extension gambit is paying off. Initial numbers indicate that the company has managed to evolve Horlicks into a superbrand, by expanding into new categories like biscuits and nutrition bars. Biscuits have grown 71 per cent year-on-year (y-o-y) due to new launches and will contribute `60-65 crore to net sales of `2,500 crore in calender year 2010.

Analysts are excited about new categories like biscuits and noodles, which are not very deeply-penetrated. Noodles will contribute approximately `60 crore to revenues this year. There is also a scope of trading upwards in the biscuits category, as 27 per cent of the market is dominated by the glucose segment. The rebranding has positioned Horlicks as a key player in the health food category and not as a key player in the malt food category. GSK Consumer registered top-line growth of 21.4 per cent y-o-y to `507.8 crore ( `418.1 crore) in the fourth quarter — aided by 15 per cent volume and seven per cent value growth — which was below the market's estimate of `525 crore.

The malt food category posted a healthy volume growth rate of 20 per cent, with Horlicks and Boost recording y-o-y growth of 20 per cent and 25 per cent, respectively. Angel Broking expects the company to clock acompounded annual growth rate of 18 per cent over calender years 2011 and 2012.

On the operating front, the company registered a margin expansion of 271 basis point y-o-y, on account of a decline in advertisement spend and other expenditure, despite a gross margin contraction of 216 basis points and a 67 basis points increase in staff costs.

With strong pricing power, GSKCH was able to expand its operating margin despite high inflation in commodities. The company plans to maintain its ad spend to sales ratio at 16 per cent, even as it further ramps up new products (especially noodles).