Glaxosmithkline Pharma's Q3FY19 results (Underperformer) - Broadly inline

Q3FY19 result highlights

• Revenues came in at Rs8.25bn above our estimates of Rs8.1bn. Revenues from the quarter grew by 17% yoy as Q3FY18 was impacted by the deflationary impact in prices on account of the GST implementation
• Gross margins stood significantly lower at 53.6% (vs 60.2%/57.2% in Q3FY18/Q2FY19) below our estimates of 57.5%. Employee expenses stood lower at Rs1.25bn (-10% qoq; +1% yoy) vs our est of Rs1.4bn. Benefits of lower employee cost was offset by higher other expenses at Rs1.8bn (+14%/11% yoy/qoq) vs our est of Rs1.6bn.
• Despite higher revenues with the fall in GMs reported EBITDA stood lower at Rs1.37bn (-3%/17% yoy/qoq) below our est of Rs1.66bn.  Reported margins stood lower at 16.6% (vs 20.2% in Q2) vs our est of 20.4% below management guidance of 18-20% margins
• Other income stood lower at Rs164mn vs est of Rs175mn. Tax rate was higher at 40.1% vs 33.1% in Q2 (est of 34%). 
• Consequently led by lower GMs and higher tax rate adj PAT of Rs0.85bn (-25% qoq; Q3 includes one time income of Rs281mn vs one time exp of Rs118mn in Q2) was significantly lower than our estimate of Rs1.13bn. Reported PAT stood at Rs1.3bn (+12% qoq).

Key positives: Higher revenue, lower employee costs

Key negatives: Lower GMs, higher other expenses and higher tax rate

Impact on financials: We have broadly maintained our FY19/20/21 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 (~41x 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 Rs1,190/share (35x FY21E EPS).