The Hindu Business Line : GlaxoSmithKline Pharma: Buy

Fresh exposures can be considered in the GlaxoSmithKline Pharma (GSK), which trades at about Rs 1,100. Over the past seven trading sessions, the stock has shed 23 per cent, compared to the 13-per cent fall in the benchmark indices.

We are of the view that the sharp correction is a good opportunity to enter the stock.

However, given the current market conditions, we believe that it is important for investors to temper their return expectations and also buy the stock in small quantity; exposures may be increased should there be a further fall in price linked to broad market weakness.

Though GSK has registered a strong showing in the first quarter of the current calendar, the performance may not be sustainable, given the VAT-related issues that prevailed in the year-ago period. However, growth may be of a more steady nature in the quarters to follow.

GSK's focus on its power brands and its decreasing dependence on drugs under the ambit of price control has paid rich dividends, lending an upward bias to margins.

That, along with its strategy of in-licensing and bringing in molecules from the stable of its global parent, should be the key thrust areas in the medium term.

Recently, GSK has also exited the animal healthcare business, which is reflective of its intent to focus on the core pharma business.

GSK may also decide to adopt the same course of action with the fine chemicals business.

The divestiture from these businesses should provide GSK with the financial muscle to aggressively pursue inorganic growth opportunities, put through another round of buy back or reward shareholders with a handsome dividend payout.

After having consistently commanded a valuation in excess of 30 times forward earnings, the current collapse in price has led to the stock trading at about 24 times its expected per-share earnings for CY07.

The fall in price appears inexplicable, given that the fundamental story has not altered. Buy with a medium-term perspective.

Nath Balakrishnan