GSK pharma's Open offer: Our view

Dec 17, 2013

Glaxosmithkline (GSK), the parent company of GSK Pharma made an open offer to shareholders to increase its stake in the latter. The price offered to the shareholders is Rs 3,100 per share. The parent company intends to buy 22,609,774 shares of GSK India, which is 24.33% of the total outstanding shares. This will increase the parent company's holding from the current 50.7% to 75%.

Threats and opportunities for GSK Pharma:

• Competition and Pricing policy pinching the company's revenues: Since some time, the competition in the Indian domestic market has intensified. In addition to this, the new pricing policy had quite an adverse impact on GSK Pharma's revenues. While, the company has not indicated the exact impact of the pricing policy, the tepid performance of three quarters clearly indicates that the company has been adversely impacted by the same. GSK Pharma derives large part of its sales from three therapies viz., vitamins, anti-infectives and dermatology. The company's anti-infective drug Augmentin is one of the largest selling drugs in the country, this drug alone is expected to be impacted significantly due to the pricing policy.

  For the upcoming period, while the company's anti-infectives, and vitamins segments are expected to continue to remain under pressure, large part of growth will come from dermatology and other segments like respiratory and vaccines.

• Low visibility of new launches from parent company: In our view, we do not expect major launches made by GSK Pharma from its parent company GSK Plc's portfolio in the near to medium term. Secondly, the company is looking to invest in a manufacturing facility in India. One should note that setting up this new facility will take time to become operational. Thus, any benefit from this cannot be expected in the near term.

We believe that GSK Pharma has challenges on various fronts, and hence growth is expected to remain muted atleast for the next 2-3 years. Having said that, even if we assume a top line growth of around 15% with EBITDA margins of around 30% over the next 2 years which we believe is quite optimistic, we are of the view that at the current price, there is still not much upside left in the stock price of GSK Pharma.

Hence in our view, investors should take the advantage of the open offer and offload their holdings.