MOSL: GSK PHARMA (Neutral)-Revenue lower than expected-Margins surprised positively

GSK Pharma: Revenue lower than expected; Margins surprised positively

(GLXO IN, Mkt Cap USD3.2b, CMP INR2439, TP INR2500, 2% Upside, Neutral)

• GSK Pharma’s (GLXO) 3QFY18 sales increased marginally by 2% YoY (-16% QoQ) to INR7b (10% miss). Other income came in lower at INR120m v/s INR319m in 3QFY17. EBITDA increased significantly by 305% YoY to INR1.4b, primarily due to a lower base (3QFY17 was impacted by demonetization). EBITDA margin stood at 20% (+1,510bp YoY). Adjusted PAT increased ~156% YoY to INR897m on the back of operational leverage and a lower base.
• Margins at a healthy level, but down sequentially: GLXO’s sales grew 2% YoY (excluding deflationary impact on prices due to GST, growth would have been ~7% YoY). Although revenue improved YoY, it was lower than our estimate due to fewer new product launches and competition in existing products. Margin improved YoY (+1,510bp YoY) primarily due to a lower base (demonetization in 3QFY17), but contracted QoQ (-290bp QoQ) due to a high base (re-stocking post GST in 2QFY18). Nevertheless, margins remain at a decent level due to a change in the product mix, lower stock impairments, and cost optimization. The company expects the EBITDA margin to be in the range of 18-20% over the medium term.
• Revenue improvement is key for growth: GLXO’s manufacturing plant at Vemgal is nearing completion (expected to be commissioned by mid-CY18), post which we expect revenues to pick up. The company is planning to diversify product portfolio going forward (currently >90% of revenue comes from the acute business). According to AIOCD, FDC-related market grew 4% YoY. Secondary sales of GLXO rose 11.2% YoY, while market secondary sales increased 7.8% YoY in 3QFY18.