GSK Consumer: Time to head for the door

Investors would do well to exit the GSK Consumer stock now

GlaxoSmithkline (GSK) Consumer Healthcare is buying back shares at a fixed price of Rs 370 per share. That's a level the GSK stock hasn't seen for the past 2-1/2 years, and so is definitely a good deal for investors.

When news came earlier this month that its board would consider a buyback, the stock had risen around 11 per cent from its levels of Rs 285. Friday's announcement took the stock another 7 per cent higher to Rs 340.

The reason it has stopped short of the Rs 370 offer price is simply that the company would buy back shares only up to 7.33 per cent of its paid-up capital, while its non-promoter holding is 60 per cent. Needless to say, not all shares that are offered will be bought back.

GSK is essentially using part (around 60 per cent) of the Rs 200-odd crore it has as free cash for the buyback. It couldn't go for a larger-sized buyback simply because the buyback size would then exceed the stipulated amount, which is 25 per cent of the equity and free reserves of the company.

But what's important is that despite the (relatively) small size of the offer, it has driven the GSK stock to nearly a 2-1/2 year high. It would be prudent for investors to exit at current levels.

Although the current price is 8 per cent lower than the buyback price, prices could drop to much lower levels after the offer is complete (Remember, the stock has moved up from the Rs 285-levels because of the buyback). This would result in lower overall returns because not all shares will be accepted in the offer.

Moreover, the company is expected to grow in single-digits just as it did in the nine months till September, when profit grew 6.6 per cent on the back of a 7.4 per cent growth in net sales.

The GSK stock has been plagued because of the low liquidity, which would only get worse after the buyback since 7.33 per cent of the company's equity shares will be extinguished.

Reliance price cut

The price cuts made by Reliance Industries Ltd (RIL) for its repertoire of polymer products are more or less been in line with the drop witnessed in international prices.

Over the past month, global polymer product prices have dropped by approximately 8 per cent. RIL cut prices by an average of 5-5.75 per cent on Thursday, following the approximate 2 per cent cut it had made on December 1.

Of course, the price of naphtha, a key input, has fallen around 9.5 per cent over the last month and this has enabled the petro-major to lower polymer product prices. Lower polymer prices are expected to help boost demand from end user industries going forward.

The key refining is also doing well with gross refining margins (GRM) continuing to grow strongly. GRMs had risen to as high as $10 - $10.5 per barrel in mid-November, much higher than even end-September levels of $8.2 per barrel.

But the subsequent fall in lower crude prices in the past few weeks has resulted in a correction, but on a year-on-year basis GRMs are still about 40-50 per cent higher.

In sum, RIL's business divisions are performing considerably better on a y-o-y basis. In the six months till September 2004, net profit rose 35 per cent to Rs 3189 crore, on the back of a 21 per cent increase in revenues to Rs 30444 crore.

But the Reliance stock has underperformed the Sensex - having declined 6.2 per cent since October, against a 10 per cent rise for the Sensex - because of the current controversy which has brought to the fore* corporate governance issues.

Market capitalisation rankings

India's market cap has moved from $280 billion to cross $350 billion this year, thanks to huge inflows from Foreign Institutional Investors (FIIs). In fact, just in September 2003, India's market cap was at less than $150 billion.

For perspective, that was way below even that of Microsoft, whose market cap is in the region of $300 billion. India now ranks sixth among Asian countries in terms of market cap, despite being much higher in the GDP rankings.

Importantly, new listings have played an important role in the rise of India's market capitalisation. The year 2004 saw some big-ticket listings including NTPC, TCS, Biocon and Patni. 
 

The pecking order
Market capitaisation in $ billion (as on Dec 8, 2004)
Japan	3579.53
Hong Kong	802.79
China	464.87
Taiwan	446.82
South Korea	395.26
India	351.97
Singapore	203.72
Malaysia	182.34
Thailand	106.14
Indonesia	71.77
Philippines	27.99
Pakistan	17.90

These companies alone added $ 30 billion to the market cap tally this year, accounting for over 43 per cent of the market cap addition this year. Needless to say, for India to rise in market cap rankings in the region, there need to be more big-ticket IPOs like NTPC.

Meanwhile, the rally in the markets propelled by huge FII inflows has seen an increase in the number of billion dollar companies (in terms of market capitalisation). At the start of the year there were 54 billion dollar market cap companies in India.

Currently, there are nine additions to the club, four of these being new listings. The remaining five companies which have seen an increase in the value over the 1 billion mark are VSNL, Container Corporation, Corporation Bank, Union Bank and Nicholas Piramal.

With contributions by Mobis Philipose, Amriteshwar Mathur and Shobhana Subramanian