Glaxosmithkline Pharma's Q2FY18 results (Underperformer) - Sequential growth recovery

Q2FY18 result highlights

• Revenues from this quarter onwards are impacted by 6% due to the deflationary impact in prices on account of the GST implementation with corresponding reduction in expenses. 
• Consequently, revenues came in at Rs8.3bn (+5%/38% yoy/qoq), below our adjusted estimates of Rs8.5bn. Although the current quarter witnessed a significant recovery sequentially, GST implementation did have some impact during the quarter.
• GMs was down 40bps qoq (+20bps yoy) to 55% ahead of our estimates of 53%. Employee expenses grew +3% yoy while other expenses dropped sharply -28% qoq (Q1FY18 included arrears for state entry tax of Rs111m and partly on account of the deflationary impact). Led by higher GMs, Glaxo reported EBITDA of 1.92bn (est of Rs1.98bn).
• Tax rate stood lower at 35.5% vs 46.6% in Q1 (est of 34%). Adj PAT of Rs1.25bn was below estimate of Rs1.4bn. Aided by higher exceptional income of Rs52m (sale of properties) reported PAT came in at Rs1.3bn (+32% yoy)
• Oberoi Reality has successfully bid for Glaxo Thane land parcel measuring 60 acres for a total consideration of Rs5.5bn. The deal is subject to compliance and statutory and regulatory approvals.

Key positives: Higher gross margins

Key negatives: Lower revenues

Impact on financials: Maintain our FY18/FY19 earnings estimates.

Valuations & view

After a prolonged period of slow growth and supply related disruptions, Glaxo had begun to shows signs of turning the corner in terms of clocking double digit revenue growth over last few quarters. However, with 1HFY18 significantly impacted by the GST related issues, the turnaround is likely to get further delayed. Despite the likely turnaround, rich valuations (~44x FY19E EPS; substantial premium to MNCs like Pfizer and Sanofi) and limited near-term triggers would cap upside from these levels. Reiterate Underperformer, with a target price of Rs2,191/share.