Glaxo SmithKline Consumer Healthcare - Parents to raise stake to 75%; Buy - Anand Rathi

GSK SmithKline Consumer Healthcare's (GSK Consumer) parent companies have announced an open offer to acquire ~32% stake in it, taking promoter holding to 75%. This indicates higher commitment from promoters. We expect higher new launches from promoters' stable and greater sharing of technology and resources. We also expect dividend payout ratio to expand and, therefore, retain Buy.

- Open offer to raise promoter holding to 75%. Glaxosmithkline Pte., along with Horlicks and Glaxosmithkline Plc., has announced open offer to acquire 13.38m shares of GSK Consumer at Rs.3,900/share, which will raise the promoter holding to 75%.

- Dividend payout to increase to above 80% most likely. Earlier, GSK had dividend payout of ~35%. With higher promoter holding, however, we expect the same to expand above 80% (Other MNC consumer companies such as Hindustan Unilever, Nestle, and Colgate have dividend payout of 80%+). GSK Consumer has cash per share of ~Rs.275 on its balance sheet and has already completed a large part of the capex for CY13 and CY14. We expect with the utilization of excess cash on the Balalnce Sheet, the return ratios will expand and it will also drive valuation multiples upwards.

- Better resource sharing by parent likely. Going forward, we see the parents in a better position to launch new products and more willing to share on technology and manpower platforms. These synergies, in turn, are bound to drive earnings for GSK Consumer over the next 2-3 years.

- Outlook strong for CY13. We expect the impact of lower sales in CSD and exports to be over by 1QCY13 and 8-10% volume growth to return. Also, the likely fall in food inflation post Dec'12 would drive gross margins and reduce the need for price hikes.

- Valuation. We value the stock at Rs.3,425 at a target PE of 25x CY3e earnings. Risks. Higher raw material prices and keener competition.

Source : Equity Bulls

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