Downgrade GSK Consumer to 'reduce'

GlaxoSmithKline PLC has now completed an open offer to acquire an additional stake in its Indian subsidiary, GSK Consumer Healthcare (SKB). The parent company’s stake has now increased from 43.16% to 72.46%. The open offer was made at R3,900 per share.

We believe SKB will still deliver ~20% profit growth in the next couple of years. However, at 30.7x CY13F EPS, GSK trades at a significant premium to its three-year average of 25x. We prefer Nestle on a relative basis at similar multiples, which has a more diverse portfolio mix.

Within the food subsector, we prefer Jubilant Foodworks as its long-term potential to drive earnings growth is significantly higher. The catalyst for the shares to drift lower will be on account of SKB’s valuations reducing to reflect the long-term earnings growth trajectory.

SKB trades at 25.4x CY14F EPS vs the sector average of ~23.9x FY15F. We believe the valuation has run ahead of the earnings growth potential due to the possibility of a delisting at some point in the future. We prefer Jubilant Foodworks at current valuations (25.8x FY15F) for which the earnings growth over the next couple of years should be significantly higher at ~37%.

After the open offer, GlaxoSmithKline’s parent now has the highest stake in its Indian subsidiary across the names in the sector. Unilever has a 52.5% stake in HUVR, Nestle has 62.8% in Nestle India and Colgate has a 51% stake in Colgate Palmolive India.

There remains a possibility that over the next few years, parent companies might look

... contd.