| Summary of Contents
| Thematic Report Shift from Asian Paints to GSK Consumer Healthcare Key points -
Asian Paints-slowdown in discretionary spend to hit sales volumes: Empirical evidence shows that the prevailing inflationary and gloomy macro-economic environment can result in a sharp slowdown in the demand for the consumer discretionary spend-led sectors like paints. A slower growth in the key user segments of real estate and automotives can dent the volume offtake in the paint sector. In FY2009, when the gross domestic product (GDP) growth rate had declined to 6.7% year on year (YoY) from 9.2% YoY in FY2008, Asian Paints' sales volume growth had declined to 13.4% from a strong 17.5% YoY in FY2008. Moreover, the company's financial performance could also get dented by a slowdown in the international business, volatility in input cost and foreign exchange (forex) fluctuations. -
GSK Consumer-demand for daily consumption items to stay relatively resilient: The sales of daily consumption items such as packaged foods, biscuits, beverages, soaps and toothpaste may not suffer in the current environment. The packaged foods companies like GlaxoSmithKline Consumer Healthcare (GSK) are likely to witness a steady volume growth in the range of 10-12% in the coming quarter. This can be attributed to the increased demand for health and wellness products, improvement in rural penetration and stable product portfolio that caters to the needs of different consumer sections in India. Moreover, GSK's better pricing power would enable it to protect its margin. -
Prefer GSK to Asian Paints: In the current environment, there is a high risk of a downgrade of the consensus earnings estimate for Asian Paints driven by both a lower than expected volume offtake and higher margin pressure. Currently, the street is factoring in an earnings compounded annual growth rate (CAGR) of 15% for Asian Paints over a two-year period of FY2011-13. On the other hand, we are quite comfortable with the compounded annual growth of high teens in the earnings of GSK due to its better pricing power and demand environment. Thus, it would be better to switch from Asian Paints to GSK for better returns over the next 6-12 months. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | |
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