FMCG Stock To Buy Now - GlaxoSmithKline (GSKCH)

New product launches and aggressive marketing strategies are paving the way for the company’s growth. Being an MNC company, it is also a good defensive fmcg stock to buy for a risk averse investor in his long term investment portfolio.

GSKCH, the Indian arm of UK-based GlaxoSmithKline, is one of the leading contenders in the fast moving health goods (FMHG) segment. Ranging from nutritional health drinks to over-thecounter medicinal products, the company has product presence in various niche categories.

With brands such as Horlicks, Boost, Viva and Maltova, the company commands a 75% market share in the health drink market. It also markets over-the-counter (OTC) drugs such as Eno, Crocin and Iodex having a strong brand equity. The company’s success lies in its strong marketing and distribution network and its rich portfolio of branded products.

The milk foods drinks (MFD) category continues to remain a fast-growing niche segment in the consumer goods market. With GSKCH commanding a leading market position in this category, it is best placed to take advantage of any upside in the segment.

The company has expanded into new product categories such as nutrition bars and noodles. During the year 2009, the company has launched new products such as Horlicks Nutribar, a nutritious snack, and Horlicks Foodles, instant noodles with seasoning. Horlicks Biscuits was relaunched with a new strategy and packaging. The company also launched ActiGrow under the GlaxoNutrition umbrella to tap the fast growing specialist nutrition segment. The company is also having products in the MFD category in smaller stock keeping units (SKUs) to tap the rural markets.

With growth increasingly coming from emerging markets, the parent company, GSK, has increased its focus on them. This is likely to further benefit the company’s Indian arm and its plans for growth.

The company’s net sales have grown at a compound annual growth rate (CAGR) of 17.4% over the past five years to Rs 1,921.5 crore in CY09. Net profit have grown at a CAGR of 26.1% to Rs 232.8 crore in CY09. The company has a strong balance sheet with healthy cash flows and zero debt. GSKCH is a consistent dividend paying company with an average dividend payout of 33%, measured over the past three years.

During the March 2010 quarter, the company registered a 20% rise in revenues and a 14.6% increase in profit. Strong performance of its key brands and robust growth in export sales contributed to the good performance in revenues. High prices of raw materials, such as milk and wheat, and aggressive ad spend put pressure on the company’s margins.

Being an agro-based industry, the company feels the heat of fluctuating input costs. Rising cost of milk and sugar prices have eaten into the company’s profit margins since the past three quarters. However, this is a factor beyond the complete control of the company. And till the time the company continues pushing its revenues, there is no cause to worry. Once raw material prices stabilise, the margins will come back to normal.

The company has outperformed the Sensex and is currently valued at over three times its annual turnover. The stock is trailing at a price-to-earnings multiple of 27. These are fair valuations for a company clocking stable growth and giving consistent returns. Investors looking at a classic stock to buy in the defensive FMCG sector can consider this stock for their long term investment portfolio.