Why GSK Is Exploring The Sale Of Its Indian Consumer Arm

GlaxoSmithKline Plc said it's considering selling stake in its Indian consumer health subsidiary to fund the buyout of Novartis' 36.5 percent stake in its consumer healthcare joint venture for $13 billion. But why the Indian arm?

For one, sales of the listed GlaxoSmithKline Consumer Healthcare Ltd., the maker of Horlicks malted milk drink, have stagnated in the last three financial years.

A potential exit also ties in with its British parent's plan to focus on the pharmaceutical business.

GSK holds 72.45 percent stake in its Indian consumer business arm and 75 percent in GlaxoSmithKline Pharmaceuticals Ltd.

GlaxoSmithKline Consumer Healthcare, in an emailed response to BloombergQuint, reiterated that the purpose of the review is to “assess strategic options for our well-known and highly valued nutrition brands, including Horlicks and Boost”. There can be no assurance that the review, to be concluded by the end of this year, will result in any transaction, it said.

A strategic review of the Indian consumer healthcare arm and the proposed buyout of Novartis' stake clearly shows that its focus is on its core pharmaceutical business and is creating a war chest by reviewing Horlicks and the Indian consumer subsidiary, Arvind Singhal, chairman at retail consultant Technopak Advisors, said.

Also, stagnant revenue suggests Horlicks and Boost that dominate the Indian market aren't growing much. The two malted drinks, according to JPMorgan, have a 56 percent share in the market. They contribute about 95 percent of GSK Consumer Healthcare's revenue.

The company faces the structural issue of decrease in consumer relevance for the health drinks and intense competition from peers like Abbott's Pediasure, brokerage Ambit Capital Private Ltd., which has a ‘Sell' call on the stock, had said after the company's December quarter results. “Rebuilding demand for the category would require significant time and margin investment. While GSK Consumer Healthcare is expected to gain market share in the health food drinks, we believe the category growth could be lower than most other FMCG categories.”

Horlicks and Boost compete with Mondelez's Bournvita, Kraft Heinz's Complan, Abbott's Pediasure and Danone's Protinex. JP Morgan, which has a ‘Buy' call on GSK Consumer Healthcare, said in a note after GlaxoSmithKline's announcement that Reckitt Benckiser has an opportunity to scale up presence in the nutrition segment after it recently acquired Mead Johnson.

A slowdown in the health drink business could result in another concern, said Sachin Bobade, senior research analyst at Dolat Capital. “Consumer companies usually have high valuations due to strong growth rates and high margins,” he said. “The health beverage category has been witnessing a consistent slowdown and even Horlicks hasn't performed well, which will impact GSK Consumer Healthcare's valuations.”

Also Read: GSK's $13 Billion Novartis Deal Is Only Just the Start