Nomura cuts GSK Consumer to 'reduce' on high valuations

Moneycontrol Bureau

Nomura Financial Advisory and Securities India has downgraded GlaxoSmithKline Consumer Healthcare to "reduce" from "buy" citing high valuations, although it still feels the malted drinks maker will continue to deliver 20 percent earnings growth.

GSK Consumer shares were up 0.5 percent at Rs 3,798 on NSE in morning trade on Tuesday.

"We believe GSK Consumer will still deliver 20 percent profit growth in the next couple of years. However, at 30.7 times calendar 2013 EPS (earnings per share) forecast, it trades at a significant premium to its three-year average of 25 times," Nomura analysts Manish Jain and Anup Sudhendranath said.

London-headquartered parent GlaxoSmithKline Plc last month completed an open offer to pick up additional stake in GSK Consumer. Post the open offer made at Rs 3,900 a share, the global pharma major hiked its stake in the company to 72.46 percent from 43.16 percent.

Based on calendar 2014 EPS expectations, the maker of Horlicks and Boost trades at 25.4 times valuations, compared with the sector average of 23.9 times FY15 EPS forecast, the analysts noted.

"We believe the valuation has run ahead of the earnings growth potential due to the possibility of a delisting at some point in the future," Jain and Sudhendranath said.

The analysts prefer Jubilant Foodworks at current valuations, and expect the operator of Domino's and Dunkin Donuts fast food chains in India to clock a significantly higher 37 percent growth in earnings over the next couple of years.

The Nomura analysts also have a "relative preference" for Nestle India, citing a diverse portfolio mix and hence a lower risk profile.