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Go Ahead With Glaxo

Glaxo is a blue-chip that is expected to maintain its operating margins in the future…

What are the prospects of GlaxoSmithKline Consumer Healthcare? I had invested in 100 shares on February 1st, 2010 at Rs1,502 and the stock is now trading at Rs 2,250. What will be the tax implication if I sell now?
- Ratikant Jhala

Glaxo SmithKline Consumer Healthcare is currently trading at a PE of 31.37 times (April 06, 2011). This is much higher than its five-year median PE of 17.70.

Over the past five years, the company's earnings per share (EPS) has grown at a compounded annual growth rate of 19.47 per cent. This gives it a PEG of 1.6. Usually, a stock is considered to be attractively valued when it has a PEG of less than one.

When one looks at both these valuation parameters, it is clear that the stock is trading in the expensive range - both considering its own historical valuations and vis-à-vis the growth rate in its earnings. Thus, based on valuation parameters, it appears that this might be a good time to sell the stock and book profits.

However, the company has sound fundamentals. It is a zero-debt company. Over past five years, its return on equity (RoE) has improved from 21.26 per cent in CY05 to 27.95 per cent in CY09.

Currently, like most companies in the FMCG sector, Glaxo too faces rising raw material costs. Expenditure on advertising is likely to stay high on account of growing competition within the FMCG sector. However, the company enjoys strong pricing power on account of which analysts expect that it will be able to maintain its operating margins in future.

What you have is a blue-chip. You can exercise one of the following two options: either sell now and book profits, or else ride this growth story for at least the next five years.

As you have held this stock for over a year, the gains will be exempt from tax as long-term capital gains tax on equities is zero.



Financials of GSK Consumer Healthcare
  5Y Growth*  2009  2008  2007  2006  2005
NetWorth(Rs) 11.32 905.1 760.88 646.35 542.72 478.44
Sales(Rs Cr) 17.38 1921.5 1541.75 1277.83 1111.94 966.85
Profit after tax(Rs Cr) 26.05 232.78 188.33 162.68 126.93 107.15
EPS(Rs)# 23.3 55.34 47.77 97.52 30.14 25.01
RoE(%)  27.95 26.77 27.36 24.86 21.26

Price 52 week High 52 week Low    
Rs 2,237 Rs 2,460 Rs 1,491    
Price as on Apr 06; *CAGR CY04-09; #EPS trailing four quarter


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