GSK Pharma’s Q1FY18 sales declined 14.4% y-o-y to Rs 5.9b, 24% miss. It recorded EBITDA loss of INR6m (est. of Rs 1.2bn) due to lower turnover, and higher other expense (includes one-time expense of Rs 111 million relating to arrears in payment of State Entry Tax) and employee expense. Reported profit after tax declined 63% YoY to Rs 264 million, including Rs 124 million of one-time income from sale of properties. Inventory destocking in the run up to GST roll-out impacted primary sales by Rs 1.3b , ~2 weeks of sales. Adjusted for the GST impact, revenue grew ~6% y-o-y in Q1FY18. Although gross margin remained largely flat y-o-y and improved marginally q-o-q, GLXO made insignificant EBITDA in Q1, Rs -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. Apart from GST, regulatory issues continued to have a negative impact on margins. We expect recovery in sales and margins from Q2, 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 Q1FY18 v/s 7.5% for the industry. We believe GLXO has strong parent support, superior brand portfolio (competitive advantage), high payout ratio (>100%) and industry-leading return ratios, RoCE of ~30%.
We maintain our ‘neutral’ rating with a target price of Rs 2,500 @ 45x FY19E PER, v/s Rs 2,700 @ 45x FY19E PER. We have cut our FY18/19E EPS by ~10/9% as we do not expect full sales recovery.