Glaxosmithkline Pharma's Q1FY19 results (Underperformer) - Below estimates

Q1FY19 result highlights

• Revenues came in at Rs7.4bn (-2% qoq, +21% yoy) below our estimates of Rs7.7bn. YoY numbers are not comparable as  Q1FY18 was impacted by the deflationary impact in prices on account of GST implementation.  Mgt indicated that LTL growth was ~11%.
• Gross margins stood significantly lower at 56.9% (-130bps qoq) below  estimates of 59%. Employee expenses were down -5%/4% yoy/qoq to Rs1.26bn. Other expenses dropped sharply to Rs1.53bn -17% yoy / +2% qoq below our est of Rs1.65bn. 
• With lower revenues and lower gross margins reported EBITDA stood lower at Rs1.4bn (-9% qoq) below our est of Rs1.62bn.  Reported margins stood at 19.1% (vs 20.7% in Q4) lower than our est of 21%. Mgmt has guided for 18-20% margins going forward
• Other income stood higher at Rs178mn (+30% yoy) vs est of Rs200mn
• Tax rate was steady at 33.9% vs 35.5% in Q4 (est of 33.4%). Adj PAT of Rs0.97bn (ex-one of Rs83mn; -8% qoq) was lower than our estimate of Rs1.15bn. Reported PAT stood at Rs0.89bn.
• Glaxo has announced bonus issues in the ratio of 1:1

Key positives: Lower employee and other costs

Key negatives: Lower revenues; lower GMs

Impact on financials: We maintained our FY19/20 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. Despite the likely turnaround, rich valuations (~53x FY20E 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 Rs2,369/share.