Standard Chartered Securities has downgraded its rating on GlaxoSmithKline Consumer Healthcare to "underperform" saying the company's growth is likely to be slower over the next three years due to lower volume growth and higher advertising spends.
"Its forward P/E of 35x is difficult to justify fundamentally given the moderate growth prospects," it said on Monday.
The maker of malted drinks like Boost, Horlicks and Sensodyne toothpaste last week reported a 13 percent year-on-year rise in second quarter net profit at Rs 120 crore. Its net sales in the April-June quarter were up 17 percent to 853 crore.
Standard Chartered said that double digit volume growth in health food drinks had helped GSK Consumer to post sales and EPS (earnings per share) CAGR (compounded annual growth) of 18-22 percent over calendar years 2007-2012. However, the slowdown in packaged foods has lowered the volume growth to 7-8 percent and the continuous increase in A&P from 12.8 percent in 2007 to 16.1 percent in 2012 has resulted in operating profit margin declining 200bps over the past five years, it said.
"Lower volume growth and continuing high A&P should limit GSK Consumer's sales and EPS CAGR to 15 percent and 16 percent over 2012-15," Standard Chartered said.
Further, little success in new launches like Nutribar, Foodles (noodles competing with Nestle Maggi) Lucozade (energy drink), Chill Dood and Boost Bytes has also "dimmed the prospects of higher growth and risk diversification," it added.
GSK Consumer shares were down 3 percent at Rs 4.310 on NSE in afternoon trade on Monday. The stock has outperformed the FMCG index by 27 percent in the past one year. Standard Chartered has a target price of Rs 3,750 on the stock.
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