Published on 24/02/2018 10:00:27 AM | Source: Motilal Oswal Securities Ltd

New products expected to drive growth - Motilal Oswal

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New products expected to drive growth

Relevance of the core category remains a concern; Valuations remain fair

Key highlights:

* Health food drinks (HFD) category is showing signs of a recovery, albeit on a low base. GlaxoSmithKline Consumer Healthcare’s (GSKC) market share, too, has been rebounding in recent months, the impact of which, however, is yet to be reflected in its financial results.

* There are now new insights (e.g. better understanding of what consumer wants) emerging in the HFD category and also for GSKC.

* While both the new products – Growth Plus and Protein Plus – are premium, there is willingness to trade-off profitability for overall growth. Unlike its earlier stance, price action is likely to be driven by commodity costs rather than setting a fixed number over inflation.

* Milo is a 500m pound brand in Malaysia, which signals the growth potential in nutrition products. RTD (Ready-to-Drink) could be a huge growth engine in India, like in other markets globally.

* Our meeting with GSKC’s management was very insightful. The company’s MD showed willingness to (i) aggressively look at potentially fast-growing adjacencies and (ii) sacrifice near-term profitability for growth – which is very encouraging. However, issues on relevance of the core HFD category continue to be a cause of concern over the longer term. Valuations are fair at ~34x Dec’18 EPS for the core business, to which we add cash per share. We maintain our Neutral rating on the stock.

Key topics of discussion in our meeting with Mr Navneet Saluja, Managing Director of GSKC, are as follows:

Entry into fast-growing segments of HFD category

1. Growth Plus: PediaSure – a product of its competitor Abbot – has been the sole bright spark in an otherwise muted HFD category in recent years. Backed by pediatrician channel support, PediaSure has been able to eat into the market shares of incumbent HFD players. Horlicks Growth Plus was launched by GSKC in response a year ago. This brand is gradually gaining traction in the pediatric segment. However, there is a high degree of brand loyalty among customers, and thus, it might be difficult to easily regain the lost market share from PediaSure. Long-term outlook appears bright, though.

2. Protein Plus: GSKC is now launching Protein Plus – another promising segment (protein) of the HFD market. Here, Protinex (Danone) is the market leader with ~30% market share, while others are mainly small and regional players. GSKC is launching Protein Plus, which it believes is not only a better product compared to incumbents (three proteins instead of one), but also tastes better and is cheaper compared to the market leader. With vegetarianism prevalent in India, the product also seeks to address protein deficiency among vegetarians. Thus, the product is not only likely to be positioned as one for customers using gyms, but also for a broader section of the population.

* GSKC has been losing market share over the past few quarters in the HFD segment, which means that it has grown at a slow pace in an already slow-growing category. With the high science portfolio (Growth Plus and Protein Plus), the company now has the products to claw back some of the lost market share.

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