GSK Pharma - Management Meet: Headwinds to Ebb Next Year - Karvy

MCap: US$3,415mn; CMP: Rs2,947; TP: Rs3,100

Open Offer of Parent Company: GlaxoSmithKline Pharmaceuticals plc has announced an Open Offer for to hike its stake in GSK Pharma by 24.3% to 75% at a price of Rs 3,100 per share. As per the Open Offer, the parent company will acquire up to 20.6 million (20,609,774) shares, representing 24.3% of the total outstanding shares of GSK Pharma. The offer represents a premium of 26% compared to the closing price on December 13, 2013. The potential total value of the transaction at the Offer price is ~Rs 64 billion (£629 million). Aberdeen currently holds 14% of the equity and is unlikely to give its stake for the Open Offer as it is a long term strategic investor. The Open Offer will enable the parent to increase its shareholding in the Indian entity and will get higher yield on cash than it is currently getting.

Outlook & Valuation: On account of trade disruptions due to margin issues in the aftermath of NLEM and other supply issues in vaccines, we downgrade our revenues by 11.1% to Rs 25.1billion for FY13. We also downgrade our revenues estimates for CY14E by 14.5% to Rs 26.52 billion on account of low base impact. We introduce CY15E estimates with EDBITA margins of 26.3% as against blue sky scenario of 30% margins. We cut our EPS estimates by 24.4% to Rs 56.4 for CY13E and by 23.7% to Rs 62.8 for CY14E. Considering the Open Offer at attractive rates, we believe it would be prudent to exercise the Offer route as the stock has already given an YTD return of 19% in CY13.

We believe that the volumes are expected to decline post Open Offer, as liquidity would be constrained similar to the case of GSK Consumer Healthcare where the volumes have shrunk to 20% as a strategic investor didn't divest its stake. We upgrade the stock to "HOLD" with an upwardly revised target price of Rs 3,100 per share based on 41.1x CY2015E.

Source : Equity Bulls

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