Also Read: GSK Pharma to perform even post open offer; hold: Edelweiss
Daljit Singh Kohli, IndiaNivesh Securities completely agrees with Nangra. However, he questions, will the stock not be available in the next five or six years at 25 times multiple or so, then why should an investor remain in the stock at 45 times multiple. "That is the reason why we are saying at this time you tender in the offer, you get out," he told CNBC-TV18.
Below is the verbatim transcript of Sarabjit Kour Nangra & Daljit Singh Kohli's interview on CNBC-TV18
Q: What would be your rationale on the view that you are taking on GSK Pharma?
Nangra: Investors who have a horizon of only one or two years and wouldn't like to hold the stock for beyond that should exit at these levels. Even if I normalise the earning volatility which has happened because of the current drug price control order (DPCO) at Rs 3100, valuations come at around 34 times CY12 numbers which we believe is pretty attractive for any investor to get into this stock. It is only for the investors who are willing to commit in this company beyond four to five years should stay put in this stock. The reason simply is that the company in the recent time has committed a lot of capex which no MNC has done it in the recent past and in fact even GSK has not done it in so many years. So, that definitely builds a confidence that the future earnings growth momentum for this company will pick up.
So, any investor who is willing to invest in this company beyond four to five years should easily make 20-25 percent return is our believe. So, long-term investors should hold on whereas near-term or short-term which we call in terms of fundamentals one to two years should take this opportunity to exit the stock.
Q: What is your opinion with regards to GSK and how are you placed on the long-term fundamentals, say four to five years down the line, how would you be placed on the fundamentals of GSK Pharma?
Kohli: For long-term fundamentals there is no doubt about this company. The only distinction between other MNCs and Glaxo has always been that it is the only company that does not have any private entity in India. So, whatever innovation or whatever products that the parent does, it comes to India in the listed company. This has been a problem with many other companies like Pifzer, Novartis, among others. We have had many other issues with other MNC companies. So, this was always the reason why Glaxo was given a premium.
Now, after the pricing policy clarity, the company has also committed large amount of money - Rs 600-800 crore for the new plant which will come in 2017. So, long-term there is no doubt but the question is in the next five years will you not get the opportunity to buy the same stock at 25 times multiple? Then why should you remain in the stock at 45 times multiple? So, it is the question of valuation, at entry point what you should do. That is the reason why we are saying at this time you tender in the offer, you get out. Maybe at some point in time in over next one to two years you will get an opportunity to buy this stock again which will be at much cheaper price.
If we compare it to the Hindustan Unilever (HUL) offer, the same thing happened. The offer came in, the stock went up so high and then for the last 3-6 months what we are seeing? So, if anybody would have given then he had an automatic opportunity in built that he could get in again. So, just take that thing in mind that you can definitely – this is a stock which should be there in your portfolio for a much longer period but at any point of time we have to be mindful of valuation. At 44 times or 34 times of CY15 and that too if you see in the last four quarters this company has not been performing. 5-6 percent kind of growth in fact after this new policy coming in has been a big drain resulting in 30 percent fall in profit. So, in terms of fundamentals they don't deserve more than 20-21 times. It was because always this expectation was built in that some day parent will increase the stake or delisting will happen - that is the reason you were seeing this kind of multiple. So, it is already overpriced. There is no reason for one to remain in this now.
Q: How do you think the stock will move now once the open offer is out of the way? At what point do you think fresh money will come in or at what point do you think some of the long-term investors would again see value in the stock and buy once this open offer is out of the way?
Nangra: Difficult to pin-point as to the stock movements but definitely once this offer is over the stock will again go back to mirror the fundamentals there is definitely a very long-term story there. However, given the fact that it is the pharma industry, valuations or stock volatilities tend to be lower. Especially as in the case of GSK we have seen it is a sturdy stock within the MNC pharma pack and it has given strong outperformance vis-à-vis other MNC companies.
So, it will remain softer and definitely for a couple of years unless DPCO effect should get negative next year onwards. Market is a bit conservative on the numbers so it will get revised. So, it will go along with the quarterly estimates. I can't pin-point a number but I guess our call is that investors should stick to the company for long. Definitely near-term if somebody is looking one or two years it makes good sense to exit the stock.
Q: Has the GSK Pharmaceutical story brought up opportunities in different pharmaceutical stories or MNC companies that are listed for example something like Merck?
Kohli: Merck is the only company in the listed space which has much lesser parent stake. I think around 50-56 percent or something. Others, all of them have 75 percent. So, there is not much of a scope unless they decide to go for delisting. So, Merck is the only one. However, Merck has a problem that its parent also doesn't have that kind of financial muscle to buy this stock - the kind of floating stock that is available. So, I guess they will need a lot more time or something happens at the parent and then only in Merck you could see this opportunity come. Only thing what this deal will do is for Merck shareholders that now they will become more sticky and people will start waiting. These things will take their own time, nobody can time them but I guess this will take time. However, in Merck case also it has been growing at a very low pace, only 6-7 percent. Definitely the valuation comfort is there in Merck. It is trading even now after 15-20 percent move in the last few days, it is still trading at 12 times or something CY14. So, Merck is definitely a good area to look at; good stock to buy.
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