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Nov 27, 2012, 08.23 AM IST | Source: CNBC-TV18

GSK Consumer open offer: Should you tender?

Sanjay Singh of Standard Chartered feels the Rs 3900 a shares offered by GlaxoSmithKline Plc in its open offer for its Indian subsidiary is “pretty fair rational valuation”. “The logic that dividend payout will increase and hence the stock will become more attractive is a flawed one,” Singh told CNBC-TV18 in an interview.

Sanjay Singh

Director, Standard Chartered Securities

Expertise : Equity - Fundamental

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Sanjay Singh of Standard Chartered feels the Rs 3900 a shares offered by GlaxoSmithKline Plc in its open offer for its Indian subsidiary is “pretty fair rational valuation”. “The logic that dividend payout will increase and hence the stock will become more attractive is a flawed one,” Singh told CNBC-TV18 in an interview.

GlaxoSmithKline Plc plans to up its stake in GlaxoSmithKline Consumer Healthcare to 75% from the current 43.16%.  The offer price was at a 28% premium to the stock’s closing price on Friday.  Today the share was locked in 20% upper circuit. However, Singh does not see stock going further above Rs 4000.  .

Also read: GSK Consumer Health locked at 20% upper circuit

Below is the edited transcript of his interview to CNBC-TV18

Q: At what 30-31 times most of the analysts have written in terms of the FY13 earnings. Do you think this is a fair level to give away the stock or is there more upside?

A: No, as a pharma investor with a medium-term view, it makes sense to tender the offer on a very logical, fair rational-basis because at 30-31 times CY13 one year forward. The company still has a very decent premium to its historical valuations or to what it should trade. I think it is pretty fair of course somebody might speculate that this could lead to further action etc, but that really is main area of speculation. On a pretty fair rational valuation-basis Rs 3900, 31 times one year forward is a fair offer for investors to tender the shares.

Q: Is there another angle to it, once the global parents get a 75 percent control over the company? Would there be more by way of a dividend payout?

A: I think this company has been used to having listed subsidiaries. So, it is not something, which it is not used to. So, I don’t think they would be bothered about having a listed subsidiary or not. And going above 75 percent would be very expensive affair for anybody, which is a delisting stake. Hence, It won’t be feasible for the company to even think about.

Q: So all this could mean that the stock could trade at higher valuations?

A: No, the dividend payout has been increasing, so the company has been deploying the extra cash and increasing bits by bits. Therefore, the dividend per share has been increasing. But even if one gives a 100 percent dividend payout that would also mean just about 2.5 percent yield, which is what most of the FMCG companies typically give. Yes, there could be one-time special dividend because there has been some cash lying in the company. So, there could be a one-time special dividend, which is a little higher. I think just because on the logic that dividend payout will increase and hence the stock will become more attractive is a flawed one.

Q: Isn’t it that a whole host of things, also float low?

A: Yes, what can happen is, once it reaches 75 percent, there is a certain amount of delisting premium which is attached to a stock. This we see in many companies these days. Due, to low float and one-time possible option there could be certain amount of valuation attached to it. However, I think still a 31 times is pretty fair enough for somebody. You are right, in a sense that it will not go back to a historical valuations of 23-25 times, maybe it will be somewhere in between. I don’t see stock going further above Rs 4000 on this hope.

Q: They have also done an offer in Nigeria. Is this something related to emerging market consumer business, which is driving this move and in that a delisting maybe ruled out and which is why investors should go ahead?

A: It is surprising that they are coming at this price. The stock was languishing at much lower levels, as low as 10 times the valuations, some years back. So, it is surprising that why the company only has 43 percent stake. Like MNC companies, it would have been a part of a global construct, a global strategy, which would have been getting implemented in India. In fact it is pretty good for investors that they are getting higher valuation and even consumer sector is doing well.

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