SmithKline Beecham Consumer Healthcare: Hold/Buy at declines

Recommendation: Hold/Buy at declines

Aarati Krishnan

WITH THE acquisition of the key competing brands, Viva and Maltova, SmithKline Beecham Consumer Healthcare (SBCH) has emerged the dominant player in the malted food drinks market.

A growth rate revival in the malted food drinks market and successful brand extensions enabled the company to report a reasonable net profit growth for the first nine months of 2000. The limited product portfolio is a disadvantage, which is probably why the valuation for the SBCH stock hovers at just around 17 times annualised nine-month earnings for 2000 (against 25 times for the companies making up the BL Consumer Confidence Index).

But malted food drinks, the category in which SBCH operates, offers scope for steady growth through higher product penetration. Given the company's stranglehold over this market, SBCH appears to be in a position to deliver consistent earnings growth over the medium-term. The stock is a good defensive investment option and can be picked up at declines in price by investors with a three-year horizon.

Malted food drinks, Horlicks and Boost, and biscuits of the same names, are SBCH's key revenue contributors. Horlicks is the dominant brand in the white drinks market, with a 51 per cent share, while Boost, a brown drink, has a 10 per cent share. In February, SBCH clinched an agreement with Jagatjit Industries to acquire the malted food drink brands, Viva and Maltova, at a consideration of Rs 86.25 crore. These two brands command a combined 7 per cent share of the malted foods market. After the acquisition, SBCH has a 68 per cent share of the market for malted food drinks. A dominant share of the category endows SBCH with several advantages over competitors -- better leverage with distributors and cost savings resulting from shared advertising and distribution.

Its strong brand equity and dominant position in the market also enabled SBCH to push through price hikes of 7-10 per cent on its key brands over the past year, while relatively new entrants such as Nestle India's Milo held their price lines. Higher realisations, a revival in the malted food offtake and the addition of new brands helped pep up SBCH's sales growth to 18 per cent in the first nine months of 2000, against 12 per cent in 1999. Given that the new brands began contributing only in March, their contribution for the full year can be expected to be higher.

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From an investment perspective, a restricted product portfolio and over-dependence on a single category are the disadvantages with SBCH. The company tried to get over this disadvantage by launching extensions of Horlicks targetted at different consumer groups -- Mother's Horlicks, Junior Horlicks and Horlicks Plus for the aged.

The company also forayed into the health biscuits market by launching Horlicks and Boost biscuits. These niche markets appear to have the potential to boost profit margins and pep up volume growth for SBCH in the medium-term. Long-term growth for SBCH will have to come from the higher category penetration in the malted food drinks. Players such as SBCH have been trying to achieve this by launching malted drinks in low unit packs affordable to lower income groups.

Given its limited product portfolio, the SBCH stock may continue to command a lower valuation than FMCG companies with a diversified basket of products. However, with its consistent financial performance and stable prospects, the stock should deliver steady returns over a three-year horizon. The stock presently trades at Rs 409.