Glaxosmithkline Pharma's Q2FY20 results (Underperformer) - Below estimates; strong sales growth

Q2FY20 result highlights

• Revs came in at Rs8.8bn, grew 8% yoy but stood below our est of Rs9.4bn. As per the company, excluding the discontinued portfolio (of tail-end brands), growth stood at 16% driven by a vol growth of 11%. The rev growth was aided by a prolonged monsoon, which in turn led to a higher incidence of infections, thereby increasing sales in its key acute therapies, anti-infectives and pain
• As per the mgt, the company had made changes to its operating model by investing resources in focus products over the last year. This is evident from 20% growth for the promoted brands during the quarter
• Gross margins stood at 58.1% (+84 bps yoy), above our estimates of 57%. Other exp were lower at Rs1.7bn (5% yoy) vs our est of Rs1.8bn
• EBITDA stood lower at Rs1.9bn (+18% yoy) below our est of Rs2.1bn, primarily due to the miss in rev est.  Reported margins stood at 22% (vs 20.2% in Q2FY19; 21.0% in Q1FY20) lower than our est of 22.2%. Other income came in lower at Rs159m (7% yoy) vs est of Rs200m
• Tax rate was higher at 45.5% (est of 27%). This included a Rs169m impact on net deferred tax due to a change in corporate tax rates and Rs390m related to exceptional items. Adjusted for this, tax rate stood at 15% for the quarter and H1FY20 tax rate stood at 25%
• The company reported exceptional items of Rs4bn. This includes a gain from sale of land (at Thane) of Rs5.5bn offset by one-time exp of Rs1.1bn owing to product recall of Ranitidine (Zinetac) and Rs0.3bn due to impairment of assets. Adj PAT stood at Rs1.5bn inline with our est. Reported PAT stood at Rs5bn

Impact on financials: We have increased our FY20E/FY21E earnings estimates by 2/16% on account of lower tax rate. We have not built in the loss in Ranitidine sales pending further clarity on way forward.

Valuations & view

After a prolonged period of slow growth and supply related disruptions, Glaxo seems to have turned the corner in terms of clocking double digit revenue growth over last few quarters. Despite the likely turnaround, rich valuations (~42x FY21E EPS; substantial premium to MNCs like Pfizer and Sanofi) would cap upside from these levels. Uncertainty on future Ranitidine sales (~5% of revs) adds to the risk. Reiterate Underperformer, with a target price of Rs1,225/share (35x FY21E EPS).