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GlaxoSmithKline Pharma: Hold

Nath Balakrishnan

SHAREHOLDERS of GlaxoSmithKline Pharma (GSK) can retain their holdings in the stock.

This recommendation represents a departure from the several `buy' recommendations we have outstanding on the stock since it was trading at the Rs 300 mark.

The current view is underpinned by rich valuations, the likelihood of the transition to a value-added tax regime causing a decline in sales in the first quarter of the current calendar, and the bottomline impact of the levy of excise duty on the basis of maximum retail price.

It has been a story of consistent improvement at the operational level for GSK Pharma over the past two years. The company has reaped the rewards of its restructuring effort, which aimed at concentrating its efforts on a set of 30 brands that fall outside the scope of price control and are, hence, more profitable.

The trend in operating margins, which have been on the rise over the past three years, a clearly indicates the benefits that GSK Pharma has derived from its restructuring exercise. From 17 per cent for the year-ended 2002, the margins rose to 23 per cent in CY-03 and improved further to 28 per cent for CY-04.

We believe that any further improvement in margin levels would be more measured compared to the strong momentum we have seen on this parameter over the past two years.

With India embracing product patents from January 1, the environment is more conducive for players such as GSK Pharma to bring in products from their global pipeline without running the risk of such products being imitated at a fraction of the cost.

However, one can expect to see such products only from 2007 onwards; further, we believe that there will also be greater clarity on the regulatory front by then. It would also take a couple of years for the upside from such launches to assume critical mass.

Given GSK Pharma's strengths in marketing, we believe that it would be a preferred in-licensing partner for companies seeking to widen their presence in the domestic market as also those aiming to establish their footprint in India.

This, coupled with its focus on power brands, should, in our view, remain the dominant themes from now and when products from its global pipeline find their way into the market.

GSK Pharma's cash pile is also a source of comfort for investors and the company has consistently rewarded shareholders with handsome dividends.

For 2004, GSK Pharma declared a dividend of Rs 24 per share (that includes a special dividend of Rs 11 per share). Shareholders can continue to expect shareholder-friendly measures from GSK Pharma.

If measures such as the reduction in the rate of corporate tax and/or the lowering of Customs duties on bulk drugs come through in the Budget, they would be positives for GSK Pharma. For the moment, remaining invested appears to be a better course of action.

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