Glaxosmithkline Pharma's Q1FY20 results (Underperformer) - Below estimates; recovery picking up

Q1FY20 result highlights

• Revenues came in at Rs7.9bn, grew 7% yoy but stood below our estimates of Rs8.2bn. As per the company, excluding the discontinued portfolio (of tail-end brands), growth stood at 12% driven by a volume growth of 8%
• As per the mgt, the company had made changes to its operating model by investing resources in focus products over the last year. Post identifying key therapies, it increased its reach by ~30% through incremental additions to the sales force. This has been showing early results, as evident from double-digit growth for most of the promoted brands during the quarter
• Gross margins stood at 58% (+108 bps yoy), below our estimates of 58.5%. Employee expenses at Rs1.43bn (+13% yoy) were inline with our est. Other expenses were lower at Rs1.49bn (-2% yoy) vs our est of Rs1.6bn, even after the company recorded a one-off expense of Rs58m in the quarter on account of provisions for VAT assessments.
• EBITDA stood lower at Rs1.65bn (+18% yoy) below our est of Rs1.82bn, primarily due to the miss in revenue estimates.  Reported margins stood at 21% (vs 19.1% in Q1FY19; 21.8% in Q4FY19) lower than our est of 22.1%. Adj for the one-off expense, EBITDA margin stood at 21.7%.
• Other income came in higher at Rs308m (73% yoy) vs est of Rs175m
• Tax rate was higher at 35.5% (flat yoy & est of 34%). Adj PAT stood at Rs1.19bn (ex-one off expense of Rs58mn) lower than our estimate of Rs1.24bn. Reported PAT stood at Rs1.14bn

Impact on financials: We have reduced our FY20/21 earnings estimates by 7%/10% respectively on account of lower revenues

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 (~39x FY21E 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 Rs1,056/share.