| Summary of Contents
| STOCK UPDATE GlaxoSmithKline Consumer Healthcare
Cluster: Evergreen
Recommendation: Buy
Price target: Rs3,000
Current market price: Rs2,670 Annual report review Key points -
CY2011 performance - high teens growth: Glaxosmithkline Consumer Healthcare Ltd (GSK) posted a high-teen growth in its top line and bottom line during the year. The top line growth of 16.5% year on year (YoY) was driven by a mix of volume and value. The malted food drinks (MFD) segment (94% of total revenues) grew by 16.3% YoY, driven by an around 9% YoY volume growth. Horlicks, which is the company's flagship brand, grew by around 18% during the year. The biscuits portfolio had done exceptionally well with a growth of 30% in CY2011. Though the operating profit margin (OPM) declined by 51bps YoY (to 15.8%), the strong growth in the business' auxiliary income and interest income resulted in an 18.5% YoY growth in the bottom line. -
Cash conversion cycle improved further: The company's cash conversion cycle improved from negative 89 days in CY2010 to negative 100 days in CY2011, indicating an improvement in working capital management. The creditor days have increased from around 139 days in CY2010 to 154 days in CY2011. Hence despite an above 40% growth in loans and advances in the last couple of years, the company's ability to generate cash from operating activities has remained strong. We expect the cash conversion cycle to further improve in the coming years. -
Return ratios remain strong: The return ratios continued to improve with the return on net worth (RoNW) and return on capital employed (RoCE) up from 32.2% and 48.7% respectively in CY2010 to 33.8% and 51.7% in CY2011. -
Cheery dividend player: The company is known to be a cheery dividend payer in the fast moving consumer goods (FMCG) space. As anticipated the company has paid a dividend of Rs35 per share in CY2011 (350% of face value). The dividend payout ratio stood at 41% in CY2011, which has improved in comparison to its average dividend payout ratio of around 33%. With the profit after tax (PAT) growth likely to sustain at close to 20%, we expect the dividend pay out ratio to sustain at around 40% in the coming years. -
Maintain positive bias on stock: We have incorporated the CY2011 balance sheet numbers in our estimates and the same has not led to any major change in our earnings estimates. Considering the low penetration of the MFD category and GSK's strong presence in it, we believe the company is well poised to achieve a top line and bottom line growth of close to 20% each over CY2011-13. At the current market price the stock trades at 26.2x its CY2012E earnings per share (EPS) of Rs101.8 and 22.1x its CY2013E EPS of Rs121.1. We maintain our Buy recommendation on the stock with a price target of Rs3,000.
VIEWPOINT Anil Well placed to cash in on the potential opportunity Key points -
High growth potential for Indian starch industry compared to global average: The starch industry in India is at a nascent stage with the per capita consumption of starch in the country being the lowest at 1.3kg compared with 64.5kg in the USA and over 10kg in many comparable Asian countries. However, the same is likely to improve in the coming years, as starch finds diverse applications in the food and beverage, paper, pharmaceutical, textile and animal feed industries. Thus, with the rising demand for starch products from various industries, the Indian starch industry is expected to grow by around 15% per annum in the coming years. -
Anil, largest player with wide product portfolio: Anil is one of the top three players in the domestic starch industry with an organised market share of close to 20%. However, in the high-margin value-added starch products it has a market share of 40-50%. Research and development (R&D) has played pivotal role in Anil's success, helping the company to gradually shift from a commodity product business to a business of value-added products. The company has reputed clients including players like ITC, Nestle India, Amway, Dabur, Heinze, Lupin, Arvind Mills and Raymond. -
Robust track record with aggressive expansion plans: Anil has grown its revenues at a robust 31% compounded annual growth rate (CAGR) in the tough period of FY2008-11. The improving revenue mix in favour of value-added products has enabled it to double its operating profit margin (OPM) to 17.2% from less than 10% earlier, resulting in an exponential growth at 76.7% CAGR in its earnings during the three-year period. Going ahead, we expect Anil's revenues to grow at a CAGR of 25% over FY2011-14 and the increasing proportion of the value-added products would further boost the margins to around 19% in the next two years. To achieve the same, the company is expanding its manufacturing capacities to 1,000 tonne per day (tpd) in a phased manner, aims to launch new products and enhance its geographical reach to newer overseas markets. -
Additional triggers-food processing park and land bank: The Anil group of companies received the approval from the ministry of food processing industries of India to set up a Mega Food Park project in Gujarat. The group will form a special purpose vehicle (SPV; a consortium of companies from the food processing, logistic and infrastructure businesses) in which Anil will have a majority stake of 40%. The group will bring in land of 87 acres (valued at around Rs25 crore) for its 40% stake in the SPV. Once the project is completed it will add tremendous value to the stock of Anil. The company's manufacturing facility is located at Bapunagar, Ahmedabad in an area covering 1.5 lakh square metre. In future the company could shift its manufacturing facility to a special economic zone / tax benefit zone, thereby unlocking value in terms of land bank (the Bapunagar land area is currently valued at Rs800-900 crore). -
Outlook and valuation: With the enhancing capacity, Anil is well poised to cash in on the opportunity created by the increasing demand for starch in the domestic market. With most of the starch consuming industries growing at a healthy rate we expect Anil's top line to grow at a CAGR of 25% over FY2011-14. Further, with an expected improvement in the OPM, the bottom line is expected to grow at a CAGR of 37.0% over FY2011-14. At the current market price the stock trades at 3.5x its FY2013E earnings per share (EPS) of Rs70.4 and 2.3x its FY2014E EPS of Rs106.1 (rough estimates). We see potential for a substantial upside in the stock over the next 12-24 months. Historically, the stock has traded at price/earnings (PE) multiple of 4-5x its one-year forward earnings.
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