March 17, 2011 GLAXOSMITHKLINE CONSUMER HEALTHCARE LTD.

HOLD
GlaxoSmithKline Consumer Healthcare Limited (GSKCHL) is an India-based company that operates mainly in the food processing industry. The company manufactures and markets malted milk food products, malted food products, biscuits and medicines. The companys product portfolio include leading brands such as Horlicks, Boost, Maltova, Viva, Crocin, Eno and Iodex. GlaxoSmithkline Plc, UK holds a 43.2% stake in the company.

Recommendations Strong Buy Buy Hold Reduce Sell

<= 1 year

1 - 2 yrs

2 - 5 yrs

GSKCHL is expected to grow at a CAGR of 18.2% in CY10-12 supported by new product

launches, higher penetration & strong performance of its key brands. The company is anticipated to post double-digit growth in its core brands, Horlicks and Boost, driven by steady volume growth and price hikes.

Strong Buy Expected Returns > 20% p.a. Buy Expected Returns from 10 to 20% p.a. Hold Expected Returns from 0 % to 10% p.a. Reduce Expected Returns from 0 % to 10% p.a. with possible downside risk Sell Returns < 0 %

During CY11-12, we expect GSKCHLs margins to remain at the current level despite
lower gross margins, driven largely by higher operating leverage and lower ad-spend. Hence, we expect earnings to post 18% CAGR driven by steady top-line growth, higher other income and price hikes.

STOCK DATA
BSE / NSE Code Bloomberg Code No. of Shares (Mn) Sensex / Nifty PRICE DATA CMP Rs (16th Mar' 11) Beta Market Cap (Rs mn) 52 Week High-low Average Daily Volume STOCK RETURN (%) 30D GSKCH -1% Sensex 0% Nifty 1% SHARE HOLDING PATTERN (%) Promoter Institution Others Total 3M -1% -8% -7% 500676 / GSKCONS SKB IN EQUITY 42 18,358.7 / 5,511.2 2,082.0 0.32 87,569 2460.00 - 1452.05 6327 6M 15% -5% -5% 1Y 37% 6% 6% 43.2 30.2 26.6 100.0

The company has a strong balance sheet with zero debt on its books and operating cash
flows of about Rs2-4bn per annum. The company plans to incur CAPEX of nearly Rs1.2bn in CY11, a major chunk of which will be used for capacity expansion.

GSKCHL is actively exploring for acquisitions in segments such as nutrition, medicinal and
OTC products. Acquisitions, if any, could be a major growth driver for the company. We anticipate that the company will use a portion of its CAPEX to acquire businesses/brands as and when opportunity arises.

In CY10, GSKCHL posted net sales growth of 20% to Rs23.1bn, while net profit increased
by 28.8% to Rs3.0bn. The growth was led by 18.4% growth in Horlicks and 24.3% growth in Boost. Volume growth in malt beverages stood at 13.8%.

Based on CY12 P/E multiple of 25, the fair value for the company works out to Rs 2,458 Financial Snapshot
Projections (Rs Mn)
Revenue Y-o-Y Growth % EBITDA Y-o-Y Growth % PAT Y-o-Y Growth % EPS Rs BVPS Rs EBITDA % NPM % ROE % PER x P/B Ratio

1 Year Price Performance (Rel. to Sensex)

70

CY07A
12,741 2,932 1,627 38.7 153.7 23.0% 12.8% 25.2%

CY08A
15,419 21.0% 3,314 13.0% 1,883 15.8% 44.8 180.9 21.5% 12.2% 24.8%

CY09A
19,249 24.8% 4,028 21.5% 2,328 23.6% 55.3 215.2 20.9% 12.1% 25.7%

CY10A
23,061 19.8% 4,941 22.7% 2,999 28.8% 71.3 228.3 21.4% 13.0% 31.2%

CY11E
27,332 18.5% 5,555 12.4% 3,398 13.3% 80.8 263.6 20.3% 12.4% 30.6% 25.8 7.9

CY12E
32,224 17.9% 6,646 19.6% 4,136 21.7% 98.3 304.8 20.6% 12.8% 32.3% 21.2 6.8

60 50 40 30 20 10 0 -10 -20

Sensex

GSKCHL

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March 17, 2011 BUSINESS PROFILE

GSKCHL is an associate of the global healthcare major, GlaxoSmithkline Plc UK, which holds a 43.2% stake in the company. It is the market leader in the malted beverages category (market share of over 70% as of CY10) with brands such as Horlicks, Boost, Maltova and Viva, which accounts for nearly 95% of GSKCHLs revenue. Nearly 85% of malted beverages sales for GSKCHL come from South & East India. Over the past 3-4 years, the company has taken a more aggressive and innovative approach to diversify its product portfolio in order to meet its target of doubling turnover in four years. In addition, it sells Eno digestive power, Crocin analgesic, and Iodex pain relief ointment; these products are made by an associate company and GSK earns commissions on these sales. Exports account for 7.6% of the companys revenues and are mainly made to Bangladesh, Myanmar, Malaysia, Sri Lanka, Middle East, Nepal and Bhutan. GlaxoSmithKline Plc, UK holds a 43.2% stake in GSKCHL

CY09 Revenue Mix

Malt Based Food (95.0%) Biscuits (3.8%) Nutrition Bar (0.6%) Ready-to-Drink (0.1%) Instant Noodles (0.1%) Ghee (0.4%)

Key Brands
Nutritional
Horlicks Junior Horlicks Mothers Horlicks Horlicks Lite Women Horlicks Boost Maltova Viva Lucozade

OTC
Crocin Eno Iodex Sensodyne

The company is the market leader in the malted beverages category with market share of 71%

GSKCHL, with its manufacturing plants located in Nabha, Rajahmundry and Sonepat, has a total workforce of over 2700 people, each driven by a spirit of enterprise. It has a strong marketing and distribution network in India comprising of over 0.65mn retail outlets. The companys business is based on scientific innovation and has dedicated consumer healthcare R&D centres. GSKCHL is in the process of increasing capacity at the Sonepat plant by 16-18,000MT per annum, which is expected to be completed by CY12. The cost of the project is estimated to be Rs 2.2bn, of which GSKCHL has already spent Rs 0.68bn till Dec10. Malted food drinks have been around in India for many decades, used as additives to milk for children's nutrition and also as taste modifiers. Increasingly health conscious consumers are looking at functional foods which provide essential vitamins, minerals, carbohydrates etc. We believe GSK Consumer will continue to register healthy revenue growth momentum given its dominant positioning and strong brand equity in malted food drink space. The company adopted a customer segmentation approach and introduced many new variants like Womens Horlicks, Horlicks Junior, Horlicks Lite etc to target need-based demand. Alongside this the company stepped up its innovation both on the product and packaging front. It introduced more flavors and more formats for its malted food products creating more excitement around its product portfolio. With rising income levels and growing urbanization, Indian consumers are now increasingly asking for nutritional and convenience foods and GSKCHLs products meet both these criteria. The companys strong focus on deepening its distribution reach aided by increasing offtake of affordable small size packs will further support growth rates. www.fullertonsecurities.co.in
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GSKCHL adopted a customer segmentation approach and introduced many new variants of Horlicks

March 17, 2011 BUSINESS PROFILE Contd.

India Malted Beverages Market Share
1% 12%

Geographic Contribution of GSKCHL's Malted Beverages

5% 5% 5%

17%

48% 37%

Per capita consumption of instant noodles in volume terms in India lags compared to other developing markets

70%

GSKCHL

Cadbury

Heinz

Others

South

East

West

North

Central

In instant noodles, GSKCHL is in a nascent stage and lags market share compared to other market leaders such as Nestles Maggi (market share of 80%). However, there exists tremendous opportunity for the segment as per capita consumption of instant noodles in volume terms in India lags compared to other developing markets.

Core brands along with strong footing, new launches hold potential: GSKCHL continues to post double-digit

growth in its core brands, Horlicks and Boost, driven by steady volume growth (management has indicated steady volume growth of nearly15%) and almost 7% from price hikes. Moreover, new product launches (Lucozade, Horlicks Cream Biscuits, Horlicks Foodles) have started gaining foothold. Horlicks Foodles, launched in the North-West markets, has received encouraging response and already gained almost 3% market share (overall India), while sustaining the 6% market share in the South-East markets. Margins to remain stable over CY10-12E

Margins to remain stable over CY10-12E: During CY2011-12, we expect GSKCHLs operating margins to remain at

nearly 20% despite higher cost, driven largely by higher operating leverage and lower ad-spend (expected to be maintained at approx.15-16% of sales). Hence, we expect net earnings to post 17.4% CAGR driven by steady top-line growth (18% CAGR) and higher other income (cash balance of over Rs9.5bn as at the end of 4QCY2010).

Horlicks portfolio re-launch will continue to aid high volume top-line growth: GSK Consumer posted an annual

growth of 21.4% in top-line in the quarter led by 15% volume growth and 7% value growth (price hikes of nearly 5% in November 2010). Exports were flat due to slowdown in the Sri Lankan markets. The MFD and biscuits segments continued their strong growth on account of re-packaging and re-launch of all products in the categories. While the MFD category posted healthy volume growth with Horlicks and Boost, biscuits also registered a hefty growth on account of new product launches. All new product launches did fairly well during the quarter. Noodles and biscuits met with positive response especially in North and West India. Cream biscuits were launched pan India during the quarter. Management expects the commodity inflation to go up to 8-8.5% but would be able to maintain margins of 16-17% led by improved realization in the MFD segment. We expect that the new product launch, along with volume growth, increasing geographic reach and market share will help the company to continue with the expected top-line growth of 18% in the next two years. www.fullertonsecurities.co.in
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Horlicks portfolio relaunch will continue to aid high volume top-line growth

March 17, 2011 BUSINESS PERFORMANCE & RISK

In CY10, net sales of the company stood at Rs 23.1bn compared to Rs 19.2bn recorded in CY09. Net profit advanced to Rs 3.0bn, from Rs 2.3bn. Growth in sales was aided by continuous focus on product innovation and expansion in new categories (new variants of Horlicks, Foodles, Lucozade), strengthening of distribution network (projected to reach 800,000 by 2012), continued investment in brand building, strategic cost management and working capital management. The year saw launch of new variant in Boost and Horlicks (Badam Masti). Horlicks posted a growth of 18.6% where as Boost grew 24.3% in the year. Volume growth in malt beverages was 13.3% while revenue growth in non-malt beverages (accounts for 6.1% of revenue) increased by 45% to Rs1.5bn. Foodles was taken national in July 2010, which clocked a turnover of Rs323.5mn in CY10. The company also launched Horlicks biscuits in 3 cream flavors and entered the cookies segment. This year also marked the companys entry in Rs1.5bn Indian energy drink market through Lucozade sport. Other income for the year has increased by 31.4% to Rs1.2bn. This was due to 16.4% increase in business auxiliary service commission and 80% increase in interest income from bank deposits. For the fourth quarter ended 31 December 2010, net sales edged up 21.4% to Rs 5.1bn compared to the same period a year earlier. Net profit rose by 58.5% to Rs 0.5bn, from the same period a year earlier. Key raw materials for GSKCHL include Milk powder, liquid milk, malt and wheat, and price changes for each have been quite volatile. In CY10 gross margins dipped 50bp y/y largely on account of higher milk prices. Prices of milk fluid were higher by 20.7% to Rs 20,628/MT and milk powder prices were higher by 10.1% to Rs148/kg. Wheat flour prices were higher by 5.1% while malt prices witnesses a fall of 8.4% for the year. However consumption of milk fluid and milk powder remained flat compared to the previous year, while wheat and malt consumption grew by 13% in line with the volume growth in the malt beverages. This could be due to higher contribution from other products such as biscuits and Foodles. In Nov10, GSKCHL undertook 5-6% price hike to mitigate input cost rise. Even management mentioned that malt prices are on an upmove and milk prices continue to remain firm, with overall input cost index likely to be up around 8-9% annually in CY11E. Since raw materials account for 37% of sales, we believe an annual 5-6% price hike should be able to neutralize the 12-15% cost inflation comfortably and help sustain stable gross margins for the company. However, we believe slowdown in consumption of malt beverages, rise in raw material prices, hindrance to increase market share in biscuit and instant noodles, entry of new players in the malted food drink space will negatively impact growth prospects of the company and might be a threat to our recommendation and price target.
35,000 28,000 21,000 14.0% 14,000 7,000 CY07 CY08 CY09 CY10E CY11E CY12E PAT Margin 7.0% 0.0%

Cash conversion cycle declined to 63 days in CY10 from 69 days in CY09

In Nov10, GSKCHL undertook 5-6% price hike to mitigate input cost rise

Revenue, Operating & PAT Margin

35%
28.0% 21.0%

Revenue & PAT Growth

30% 25% 20% 15% 10% 5% 0% CY07 CY08 CY09 CY10E CY11E CY12E

Volume growth in malt beverages in CY10 was 13.3% while revenue growth in non-malt beverages increased by 45%

Revenue (Rs Mn)

EBIDTA Margin

Revenue Growth

PAT Growth

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March 17, 2011 VALUATION & PEER COMPARISON

We expect GSKCHLs revenues to grow at a CAGR of 18.2% over CY10-12 to Rs 32.2bn from Rs 23.1bn in CY2010. We further estimate that PAT would grow at a CAGR of 17.4% over the same period to Rs 4.1bn in CY2012 from Rs 3.0bn. GSKCHL was trading at a 2 year forward P/E multiple of 10.5x in CY07 and has reached 17.7x in CY10. Going forward we expect with further volume growth in malted food drinks, expansion of product portfolio, increase in geographic reach in West, North and Central areas of the country will help GHKCHL to increase its revenue growth in the coming years and to continue its growth story. Considering all the points, we believe that GSKCHLs 2 year forward P/E multiple would expand further to 25.0x by CY12. We expect GSKCHLs revenues to grow at a CAGR of 18.2% over CY10-12 to Rs 32.2bn from Rs 23.1bn in CY2010

So based on CY12 P/E multiple of 25, the fair value for the company works out to be Rs 2,458
We recommend a HOLD rating on the stock.

Financial Analysis and Projections

Particulars (Rs Mn)
Net Revenue Other Income Total Income Operating Expenditure Depreciation EBIT EBIT Margin (%) Interest Profit Before Tax Less: Tax Profit After Tax PAT Margin (%) ROE (%) EPS (Rs) BVPS (Rs)

CY07A
12,741 685 13,699 10,767 435 2,497 19.6% 46 2,451 824 1,627 12.8% 25.2% 38.7 153.7

CY08A
15,419 955 16,833 13,519 420 2,894 18.8% 53 2,841 958 1,883 12.2% 24.8% 44.8 180.9

CY09A
19,249 919 20,306 16,279 420 3,607 18.7% 43 3,565 1,237 2,328 12.1% 25.7% 55.3 215.2

CY10A
23,061 1,174 24,533 19,592 397 4,544 19.7% 26 4,518 1,520 2,999 13.0% 31.2% 71.3 228.3

CY11E
27,332 1,412 28,962 23,407 442 5,113 18.7% 41 5,072 1,674 3,398 12.4% 30.6% 80.8 263.6

CY12E
32,224 1,698 34,180 27,534 431 6,215 19.3% 42 6,173 2,037 4,136 12.8% 32.3% 98.3 304.8

Based on CY12 multiple of 25.0, fair value for company works to be Rs 2,458

P/E the the out

Valuation Ratios (x)

P/E P/B

CY11E
25.8 7.9

CY12E
21.2 6.8

Peer comparison
GSKCHL enjoys a monopoly position in India in malted food drinks, with its key brands such as Horlicks and Boost, compared to other players in the segment such as Cadbury, Dabur etc. In biscuits and instant noodles, the company lags market share compared to other leaders in the respective segment such as Britannia and Nestle respectively. However, we believe GSKCHL will continue with its top-line growth story supported by volume growth in malted food segment and high pace market penetration in newly ventured segments such as biscuits, energy food & drink and instant noodles. GSKCHL will continue with its top-line growth story supported by volume growth in malted food segment and high pace market penetration in newly ventured segments

Peer Group Comparison

Companies GSKCH Britannia Industries Nestle India EBIDTA Revenue Margin (Rs. mn) (%) 23,061 37,708 62,548 21% 5% 20% PAT Margin (%) 13% 3% 13% ROE (%) 31% 33% 96% P/E (x) 29.2 9.3 43.7 P/B (x) 9.1 3.1 41.8 CMP (Rs.) 2082 362 3710 FV (Rs.) 10.0 2.0 10.0 EV (Rs. mn) 78212 46969 362782
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EV/EBIDTA (x) 15.8 24.7 28.6

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March 17, 2011

Board of Directors Director Name Current Position Description
He is currently the Non Executive Chairman of GlaxoSmithKline Consumer Healthcare Limited. Simon Scarff started his career at Horlicks Limited, UK (now part of GlaxoSmithKline plc). He was first in India in 1963 at Nabha, in Punjab, responsible for the marketing and sales of the company's products. He then returned to the UK to work within the UK Marketing department. In 1974, he was appointed Coordinator on the Consumer Brands business in Nigeria. In 1976, he was appointed Regional Group Manager, responsible for the Near and the Middle East, initially based in Cyprus and later in Dubai. He returned to India as the Managing Director on the 1st of June, 1978 and led the company till October 2002. In January 1999, Mr. Scarff was awarded the Officer of the Order of the British Empire (OBE) by Her Majesty the Queen of England in the New Year's Honour List (1999) for services to British Industry. In 1993, he was appointed as a Director of SmithKline Beecham Pharmaceuticals India Limited (now GlaxoSmithKline Pharmaceuticals India Limited), and he continues in this post. He is also a Director in several other organizations and Chairman of charitable groups in India. Mr. Zubair Ahmed took over the responsibility for running the Consumer Healthcare business in the India Sub-continent region, as Managing Director, effective 1st January, 2007. Mr. Ahmed brings to this role a wealth of thirty years of experience in the FMCG sector. Prior to joining this Company, Mr. Ahmed was the Managing Director of Gillette India Limited where he was credited for turning the company's business onto a profitable growth path as well as spearheading Gillette's clear value leadership in its product categories in India. Mr. Ahmed was associated with Gillette for over 14 years where his leadership competencies in the areas of strategic planning, strategic relationship building and result orientation led him to work on prestigious assignments in the company's operations in Middle East and India. Mr. Ahmed has also worked with leading companies like Voltas and Unilever in the past.

Mr. Simon Scarff

Non Executive Chairman

Mr. Zubair Ahmed

Managing Director

Mr. Kunal Kashyap

Mr. Kunal Kashyap is a Chartered Accountant by profession and is currently the Chairman and Managing Director of Allegro Capital Advisors Pvt Ltd, a leading Investment Bank. Mr. Kunal Kashyap was also the founder and executive director of Celstream Technologies Pvt. Ltd, a leading software product engineering organisation. During the period 1994-2000, he was a global partner at Arthur Non Executive Director Andersen responsible for developing the firms' practice in South India. Mr. Kunal Kashyap has also been responsible for managing the treasury and Business Development functions for Asia Pacific at Digital Equipment Corporation. Since March 28, 2001, he has been a Director of this company. Mr. P Dwarakanath retired as Director - Human Resource of the Company w.e.f. July 31, 2006. Mr. Dwarakanath has over 34 years of experience in Engineering, Chemical, Pharma and Consumer Goods industry in the core functional areas of Legal, Employee Relations, Non Executive Director Management Development, Leadership Development and HR Management. He has been actively involved in various professional bodies including a successful stint as President of Delhi Management Association (2000/2001). Mr. Praveen K Gupta joined this Company in 1975. Since then he has held positions of increasing responsibility in Finance, Procurement, Materials Management, and Supply Chain Management. He was previously Site Director of the Nabha facility and Operational Excellence Country Champion for GMS Consumer Healthcare, India. In these roles he has made significant contributions towards the evolution and performance of the Nabha site and has driven the highly successful Operational Excellence programme in India. Since January 24, 2006, Mr. Praveen K Gupta is holding the position of Director Operations of the Company. In this role he has made significant success in building up a strategy aligned to business growth, strong performance and compliance culture and has made significant contribution to cost reduction initiatives. Mr. Subramanian joined GlaxoSmithKline Consumer Healthcare Limited in 2006 as Deputy CFO and was promoted as Director - Finance & IT effective December, 2007. He brings to the Organization a rich 25 years of experience in the FMCG sector, spent across several positions in Finance & procurement functions, in varied foods categories in Hindustan Unilever Ltd. Between 2000-2005, as the Head of the Foods & Beverages Division he was credited with conceptualizing and implementing several innovative and effective measures, to reduce cost and drive Profit growth, across categories. The past year saw him carrying the momentum into GSK where his contributions to Strategic Cost Reduction projects have been Significant. He is a cost accountant by profession.

Mr. P. Dwarakanath

Mr. Praveen Gupta

Director Operations

Mr. Ramakrishnan Subramanian

Director, Finance and IT

Mr. Naresh Dayal

Mr. Naresh Dayal, IAS, has worked with the Government of India for 37 years in various positions at the state and national levels. As Secretary, Ministry of Health and Family Welfare, Mr. Dayal has been responsible, among other things, for all policies and programs in Non Executive Director Public Health, supervising National Health Authorities, assessing and devising the policies for the countrys manpower requirements in health. Mr. Dayal holds a Masters degree in Arts from University of Delhi and also in Professional Studies, Agriculture, from University of Cornell, USA. Mr. Mukesh H Butani is a Chartered Accountant and is the co-founder and Partner at BMR Advisors, a leading professional service firm with competencies in the area of Tax, Mergers & Acquisitions and Risk and Business advisory services. Mr. Butani has over 24 years experience in advising several fortune 500 multinationals on a range of cross border tax structuring, transfer pricing, mergers & acquisitions, inbound investment structuring and tax controversy matters. Mr. Butanis expertise lies in the area of transfer pricing and Non Executive Director has authored treaties on transfer pricing for Lexis Nexis Butterworths, Wolter Kluwers & International Bureau of Fiscal Documentation. He has been a member of Indian government task forces on tax matters and participates in committees on tax policy changes. He is currently a member of OECDs business restructuring advisory group and ICC, taxation commission. He is a member of UN Tax experts sub-committee on dispute resolution and is on the editorial boards of Tax Views Asia and International taxation by Taxmann India.

Mr. Mukesh H Butani

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