Glaxosmithkline Pharma's Q3FY18 results (Underperformer) - Weak performance

Q3FY18 result highlights

• Revenues from the quarter were impacted by 5% due to the deflationary impact in prices on account of the GST implementation with corresponding reduction in expenses.
• Revenues came in at Rs7bn (-16% qoq, flat yoy), significantly below our estimates of Rs7.8bn.
• GMs improved significantly 1070bps/520bps yoy/qoq to 60.2% ahead of our estimates of 54% led by improved product mix, lower stock impairments and other credits. Employee expenses grew +3% yoy while other expenses dropped sharply -11% qoq (partly on account of GST related accounting). However led by lower revenues Glaxo reported lower EBITDA of 1.48bn (est of Rs1.62bn) despite higher GMs. Margins stood at 20.1% (vs 23% in Q3) lower than est of 20.7%.
• Tax rate stood at 36.1% vs 35.5% in Q2 (est of 34%). Adj PAT of Rs0.9bn was below estimate of Rs1.1bn.
• Glaxo has received the advance from Oberoi Reality for the Thane land parcel measuring 60 acres. The total consideration was Rs5.5bn.

Key positives: Higher gross margins

Key negatives: Lower revenues

Impact on financials: We have reduced our FY18/FY19 earnings estimates by 13%/9% to account slower revenue growth. We have introduced FY20 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 (~42x FY19E 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.