Nomura Financial Advisory and Securities has upgraded GSK Consumer Healthcare  to 'Neutral' with target price of Rs 6,150 as against current market price (CMP) of Rs 6,269 in its report.

Commenting on the investment rationale, Nomura said, "For FY15F, we estimate that nearly 30% of the company’s net income should be derived from ‘other income’. For other consumer companies in the sector this is a very small portion of their income and hence we are able to value GSK Consumer on a reported P/E basis after making adjustments for non-operating income or losses. For GSK Consumer since the number is nearly 30%, we do a sum of the parts valuation (SOTP).

"We believe this is essential as cash on the books should not be given the same multiple that we give to the operating assets of the business as it does not generate similar returns. In our view, the company would benefit from a clearer direction in its use of cash going forward; if there are no opportunities to invest it in the business then we would suggest a large one-time pa-out be explored as an option. However, until the ratio of cash on the balance sheet declines, we believe it is correct to value the company on a SoTP basis."

"We roll forward our valuation to FY17F basis and also move our valuation multiple higher to 35x from 25x. The higher P/E multiple is justified, in our view, as valuation multiples across the sector have moved up over the past six months. We value mid-cap HPC consumer companies at 32x one-year forward earnings and given the strong visibility of revenue growth over the medium term, consumer multiples are likely to remain elevated," it said.

"We upgrade SKB to Neutral based on a higher target multiple (35x vs. 25x earlier), despite some earnings downgrades (due to FY15F EBITDA margins being lower than earlier expectations), as we believe operating performance is likely to see an improvement over the next year. Our SOTP-based valuation of  Rs 6,150 implies 1.1% downside from current levels, but any sharp correction should be seen as an opportunity to buy. Our preference in order within the Food space now stands at Britannia (BRIT IN, Buy) Nestle India (NEST IN, Buy) and SKB," Nomura added.

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