Glaxosmithkline Pharma's Q2FY19 results (Underperformer) - Broadly inline

Q2FY19 result highlights

• Revenues came in at Rs8.2bn above our estimates of Rs7.9bn. Revenues were -2% yoy lower on account of high base in Q2FY18 arising from channel restocking post GST implementation.
• Gross margins stood at 57.2% (+30bps qoq) marginally below our estimates of 57.5%. Employee expenses at Rs1.4bn (+3%/11% yoy/qoq) were inline with our est. Other expenses were also marginally higher at Rs1.63bn (+23%/7% yoy/qoq) vs our est of Rs1.6bn.
• With higher revenues and steady gross margins reported EBITDA stood higher at Rs1.65bn (+14% qoq) above our est of Rs1.57bn.  Reported margins stood at 20.2% (vs 19.1% in Q1) higher than our est of 19.7%. Management had earlier guided for 18-20% margins
• Other income stood lower at Rs148mn (-16% qoq) vs est of Rs175mn
• Tax rate was lower at 33.1% vs 33.9% in Q1 (est of 34%). Adj PAT of Rs11.2bn (ex-one of Rs118mn; +16% qoq) was higher than our estimate of Rs1.08bn. Reported PAT stood at Rs1bn (+14% qoq).

Key positives: Higher revenue, inline employee and other costs

Key negatives: Lower GMs

Impact on financials: We have 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 (~48x 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 Rs1,185/share.