Buy GSK Consumer Healthcare; target of Rs 630: Khandwala

Khandwala Research has recommended buy rating on GlaxoSmithKline Consumer Healthcare with a target of Rs 630.

Khandwala Research report on GlaxoSmithKline Consumer Healthcare:

Glaxo SmithKline Consumer Healthcare (GSK Consumer) is an  Indian associate of Glaxo SmithKline Plc. UK, (holds 43% equity stake).  GSK Consumer is the largest player in health food drinks industry in  India. Its brand portfolio includes super brands like Horlicks, Boosts  and Maltova. The company enjoys market leadership in 90,000 Tonnes  Indian malted milk food market.

Investment Positive: 

Brand portfolio consists of ingrained brands: 

Company’s brand portfolio includes ingrained brands like Horlicks  (existing since 1930), Boost and Maltova. Horlicks enjoys more than  50% of Health Food Drink market. Boost has a market share of  ~13% across the nation, while it commands a market share of 24%  in southern part. 

Ban on export of Skimmed Milk Powder (SMP) -Margin erosion  may arrest 

On 1st February 2007, the government announced ban on SMP  exports till September 30, 2007 as part of its effort to curtail  inflationary pressures in primary articles. The SMP price has  increased by more than 30% as compared to last year. SMP is a key  raw material and the closing of the export window may bring down  domestic SMP prices and will help to arrest the margin erosion. 

Rich Cash Flows: 

For the year ended 2006 the company had cash & cash equivalents  along with liquid investments stood at INR 2,676 million (i.e. INR  64/- per share). Besides this, its rich cash flow gives free cash flow  yield of ~7%. Healthy cash position could help management to  grow inorganically. 

Attractive Valuation: 

GSK Consumer currently trades at a PE multiple of 15X on  CY2007E and at 12.4X on CY2008E, which looks attractive in  consumer goods space. We initiate our coverage on GSK Consumer  with BUY recommendation at target price of Rs 630 per share,  based on 15x 2008(E) earnings. Our target price gives 23% upside  and ~2.5% of dividend yield, resulting in total return of ~26%.