Booster shot for GSK Pharma

Written by fe Bureau | Mumbai | Updated: Dec 17 2013, 09:12am hrs
GlaxoSmithKline Pharmaceuticals (GSK Pharma) surged to a historic high on Monday after the parent company, GlaxoSmithKline, surprised the Street by announcing to increase stake in the Indian subsidiary to 75%. Posting the biggest single-day gain in more than 23 years, share of GSK Pharma surged nearly 20% on Monday. The scrip touched an intraday high of R2,952, before ending at R2,927.40, up R459 or 18.6% from Friday's close.

Since almost 13.5% shareholders are individuals and based on previous experience individual participation in the open offer will be anywhere between 50-60%. However, as far as institutions holding is concerned, company has almost 34% institution holding and it is very difficult to predict whether institutions will participate in open offer or not. Hence, we designed different scenarios and come up with different acceptance ratios along with expectation return, said a report by Anand Rathi Securities.

Trade volumes spiked 16.1 times their 30-day average daily volume. As many as 6.39 lakh shares exchanged hands on Monday compared with 30-day average volume of 39,615 shares.

UK-based GSK had offered to buy 2.06 crore shares (24.33% stake) at R3,100 apiece a premium of 26% to Friday's close of R2,460.15 thus, valuing the deal at roughly $1 billion, citing India's long-term demand growth story.

The parent company's 2012 annual report suggests promoter holding in the highly populated nations like India and China is at the lowest level compared with other subsidiaries. GlaxoSmithKline has a total of 105 subsidiaries, of which the company enjoys full ownership in 93 companies and over 75% in eight other entities.

In India and China, however, promoter entities hold 51% and 55%, respectively, as on quarter ending September 30, 2013.

Analysts said slowdown in developed markets due to loss of patents, foreign pharmaceutical companies are now hoping to cash in the Indian pharmaceutical market which grew 16.6% in FY13. The recent 15-20% fall in the Indian rupee also offers an opportunity for acquisitions.

We expect GSK Pharma's performance to improve from CY13 onwards due to new product launches and growth in existing products. GSK Pharma is a zero debt and cash-rich company. The company enjoys robust ebitda margins of over 30% which is among the highest in the industry, and hence commands a premium valuation over its peers, stated a report by Centrum Wealth Management.

For CY12, the company had declared a dividend of R50 per share, giving a yield of 1.71% at the current price. According to Bloomberg estimates, GSK Pharma may declare dividend of R55 per share for CY13.

According to Alok Dalal, an analyst at Motilal Oswal, India has always been important for Glaxo and it seems to be focusing on long-term prospects. Overall, all foreign companies are looking at emerging markets positively.

While the company is yet to announce the opening and closing date of the offer, the formalities are usually implemented in three months from the date of announcement, as per Securities and Exchange Board of India's (SAST) Regulations.

Analysts say the trend of MNCs acquiring stake in Indian subsidiaries is likely to continue driven by interest rate arbitrage as well as foreign exchange advantage that overseas parent entities enjoy after the recent fall in the Indian rupee. According to Bloomberg, the rupee is down nearly 15% since May this year.

The rupee has significantly depreciated in the last two years. We believe this provides good opportunity to the MNCs to either increase their stake in the Indian subsidiaries up to 75%, stated the Centrum report.