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Glaxosmithkline Pharma's Q3FY20 results (Underperformer) - Weak quarter exacerbated by Ranitidine related one-offs

Q3FY20 result highlights

• Consol Revs came in at Rs7.8bn, declined 5.7% yoy significantly below our est of Rs8.9bn. As per the company, excluding the discontinued portfolio (of tail-end brands) and voluntary recall of Zinetac, growth stood at 6%. This implies a sales loss of Rs963m due to these factors. Notably, as per IMS, Zinetac annual sales were ~Rs2bn
• Glaxo has been investing resources in focus products which is evident from 11% growth for the promoted brands during the quarter – partially aided by a strong anti-infective season.
• Gross margins stood at 57.9% (+430 bps yoy), above our estimates of 57.5%. SGA exp stood at Rs3.3bn (7% yoy) vs our est of Rs3.2bn
• EBITDA stood lower at Rs1.2bn (-9.4% yoy) below our est of Rs1.95bn, hurt by negative operating leverage, due to lower revs.  EBITDAM stood at 16% (vs 16.6% in Q2FY19; 22.0% in Q2FY20) lower than our est of 21.9%. Other income came in at Rs165m (flat yoy) inline with est
• Tax rate was lower at 22.4% (est of 25.6%). This included a Rs169m impact on net deferred tax due to a change in corporate tax rates and Rs183m related to exceptional items.
• The company reported one-time expense of Rs7.5bn. This includes Rs6.4bn of financial impairment connected to under-utilisation of manufacturing facilities (Vemgal) due to an investigation into the potential source of the NDMA, which was found in Ranitidine products, and Rs1bn related to other related costs
• Mgt cited they will review strategic options for the new Vemgal facility in light of recent events, including a potential sale of the site

Impact on financials: We have reduced our FY20e/FY21e earnings by 12%/ 13% to account for lower sales. We also introduce FY22 estimates.

Valuations & view

While the disruption/financial impact from Zinetac recall is a disappointment, Glaxo’s broader business has begun to recover over the last few quarters. Partially aided by strong anti-infective season, barring this quarter, Glaxo seems to have turned the corner in terms of clocking double digit revenue growth over last few quarters. The sharp upmove in recent prices in the turnaround. Rich valuations (~41x FY22E EPS; substantial premium to MNCs like Pfizer and Sanofi) would cap upside from these levels. Reiterate Underperformer, with a target price of Rs1,268/share (35x FY22E EPS).