MOSL: GSK PHARMA (Neutral)- GST impacts revenues, margins tank

​GSK Pharma: GST impacts revenues, margins tank

(GLXO IN, Mkt Cap USD3.3b, CMP INR2510, TP INR2500, 0% Upside, Neutral)

• GSK Pharma's (GLXO) 1QFY18 sales declined 14.4% YoY to INR5.9b (24% miss). It recorded EBITDA loss of INR6m (est. of INR1.2b) due to lower turnover, and higher other expense (includes one-time expense of INR111m relating to arrears in payment of State Entry Tax) and employee expense. Reported PAT declined 63% YoY to INR264m, including INR124m of one-time income from sale of properties.
  
• GST impact evident, recovery expected in coming months: Inventory de-stocking in the run up to GST roll-out impacted primary sales by INR1.3b (~2 weeks of sales). Adjusted for the GST impact, revenue grew ~6% YoY in 1QFY18. Although gross margin remained largely flat YoY and improved marginally QoQ, GLXO made insignificant EBITDA in 1Q (INR-6m) as operating cost below GM remained largely flat. Unlike Alembic which reduced its promotional expense during the quarter, it looks like GLXO has maintained its marketing expense, and thus, other expense for the company went up during the quarter despite lower sales.
• Margin improvement is key: Apart from GST, regulatory issues continued to have a negative impact on margins. We expect recovery in sales and margins from 2Q, led by channel re-filing. According to AIOCD, FDC-related market (which declined 10.9%) continued to drag companies. Secondary sales of GLXO increased 8.6% in 1QFY18 v/s 7.5% for industry.