GSK Consumer: Volume recovery must for any re-rating

Despite undemanding valuations, missing catalysts could keep a lid on the stock price

GlaxoSmithKline Consumer Healthcare (GSK Consumer) has been struggling to grow in the past few quarters amid slowing consumption and intensifying competition. Volume growth in the company's mainstay – malted food drinks (MFD) category has remained under pressure in the past seven quarters. After posting zero growth in the past three quarters FY16, volumes have fallen in the first two quarters of FY17. Rising competitive intensity from players such as Patanjali is a key factor affecting GSK Consumer, apart from subdued consumption demand. Although the company's flagship brand Horlicks continues to gain some market share, it has failed to lift sales growth. 

In this backdrop, it is not surprising that the GSK Consumer scrip has lagged S&P FMCG index in the past one year. It has fallen 19 per cent in this period versus a seven per cent gain registered by the FMCG index. Current valuations of 30 times FY17 estimated earnings are, however, higher than its own historical average one-year forward price-to-earnings ratio of 24 times. 

The silver lining, though, is that demonetisation is unlikely to worsen things for the company. "We do not think demand for products addressing kids’ nutrition, like those of Glaxo Consumer; will witness any huge impact in FY17 or FY18," wrote analysts at Motilal Oswal Securities in a recent report. The company could also benefit from the rollout of the goods and services tax. "Total indirect tax incidence for GSK Consumer is 24-25 per cent and if the MFD products are slotted in 18 per cent GST rate basket, GSK Consumer would stand to benefit," wrote Latika Chopra, consumer analyst at JP Morgan. 

GSK Consumer is taking multiple steps to revive growth such as expansion in rural areas and focus on innovations. Focus on expenditure rationalisation and benign input cost inflation could enable the company to sustain margins at current levels, believe analysts. A revival in consumption demand will be positive given that Horlicks continues to enjoy leadership position. 

 

The company forayed into the Marie biscuits segment in the September quarter by launching Horlicks Marie in East India. The company is revising its strategy for non-MFD segment comprising noodles, oats, biscuits and nutritional bars. If these strategies work, non-MFD products will act as another key growth engine for the company. 

For now, though there seems to be a dearth of positive triggers for the company. Street will be eyeing for sustained improvement in volume growth, which is a pre-requisite for any improvement in investor sentiments around the stock.