Buy GSK Consumer; target of Rs 6765: ICICI Direct

GCHL has been a market leader in Indian health food drinks (HFD) industry with a market share of 58.3% by value and 66.4% by volume (Q2FY17). Malt-based drinks category contributes 91% to GCHL’s revenues. The malt based beverage market is estimated to have grown 2.7x from Rs 2200 crore in 2009 to Rs 6000 crore in 2014 and is expected to reach Rs 7800 crore in 2016. With higher health consciousness, a large youth population, growing urbanisation & rising discretionary consumption, HFD stays one of the high growth segments. India is the largest malt-based drinks market globally accounting for 22% of retail volume sales. As an established player in this segment, GCHL has benefited with 17.5% CAGR in total operating income in CY09-FY15 and volume CAGR of 9.4%. Going forward, we are modelling muted revenue growth for FY17E on account of demand pressure. However, we are estimating 15% YoY revenues growth in FY18E largely led by a mix of volume and realisation growth.

The category in which GCHL operates currently has low penetration level of 40%, thereby providing huge scope of growth for the company. Flat sales growth in FY16 has resulted in creation of a low base. Going forward, we expect PAT to grow at a CAGR of 9.5% in FY16-18E. A favourable sales mix and saving in advertisement expense is expected to aid margins at 20.0% by FY18E. We reiterate our BUY recommendation on the stock with target price of Rs 6765, valuing it at a multiple of 35x for FY18E EPS.