GlaxoSmithKline raises stake in Indian arm to 75%, stock declines

Written by fe Bureau | Mumbai | Updated: Mar 11 2014, 11:08am hrs
Diversified British healthcare company, GlaxoSmithKline PLC successfully acquired 24.33% in its Indian subsidiary GlaxoSmithKline Pharmaceuticals (GSK Pharma) from public shareholders via a voluntary open offer, helping the parent company raise its stake to 75%.

The R6,389 crore-buyback was subscribed nearly 1.13 times, sources said. More than 2.32 crore shares were tendered by shareholders, a majority of which were retail investors, against the proposal to buy 2.06 crore shares at a price of R3,100 per share. The offer was solely managed by HSBC Securities and Capital Markets (India).

The acquisition further increases GSK PLCs exposure in a strategically important and highly-populated market like India. The British healthcare conglomerate intends to keep its Indian subsidiary listed on the stock exchanges, the company said in an exchange filing, citing future growth prospects as well as GSKs long-standing commitment to the country.

Even as long-term growth looks positive, analysts said that a majority of retail and minority shareholders were compelled to tender shares due to earnings contraction in CY13, a weaker outlook for CY14, and high valuations compelled amid expectation the stock may witness a sharp correction after the conclusion of the offer.

Many domestic and foreign analysts foresee the stock to test pre-offer levels. Of the total 24 analysts polled by Bloomberg, 14 have a sell rating on the stock, seven have a hold rating, and one has a buy rating on the stock. GSK Pharma trades at 37 times price-to-earnings CY14e, according to Bloomberg. In CY13, the stock gained 40% vis-a-vis 6% gains of Nifty, and 22% gains of BSE Healthcare.

Meanwhile, GSK shares declined for the fifth consecutive session on Monday. The stock ended at R2,509.80, down 5.27% (R139.50). During Mondays trading, the stock touched a three-month low of R2,491.05. GSK shares have already declined nearly 18% in the last five sessions after touching a life-time high of R3054.40 on the BSE in the aftermath of the open offer.

The potential recovery in growth and margins in CY14 are already built into our estimates, said IndiaInfoline Institutional Equities analyst Bino Pathiparampil. The (GSK Pharma) stock trades at 48.8x CY14ii core earnings at an unjustifiably high premium to domestic pharma companies at 18-24x forward earnings, Pathiparampil said in his research note.

GSK Pharma reported CY13 net sales at R640 crore, down 3.8% y-o-y due to sharp cut in prices, supply constraints and trade disruptions. Margins declined to 10 percentage points to 21% due to rupee depreciation and higher marketing spends. The stock had surged 20% after the parent company first announced a voluntary open to increase stake in the Indian subsidiary.