Strides Pharma Science's Q1FY20 results (Outperformer) - Turnaround gainsmomentum

Q1FY20 result highlights

• Consol Revs came at Rs6.9bn vs est of Rs6.3bn; Q4 was Rs8.4bn. US revs grew at a CC growth of 6.1% qoq to $56m vs est of $53m.
• Other regulated markets stood at Rs1.7bn, which includes the merged Arrow entity. Supplies to merged Arrow Apotex entity(Arrotex) to start from Q2FY20 and expected to be at full potential starting Q4FY20
• Emerging markets business stood at Rs1.3bn vs est of Rs1bn led by recovery in institutional business post better customer off take
• EBITDA and GPs higher than est - EBITDA came at Rs1.2bn / EBITDAM 17.6% as the company reported nos on a continuing business basis. Notably, Rs1.2bn EBITDA is near equivalent to the Q3FY19 EBITDA (inclusive of the Australian business) - indicative of the significant scale-up in the ex-Australia business profitability in last couple of quarters.
• GMs were 53.9% vs est 55% (Q4:53.5%); GPs of Rs3.7bn vs est of Rs3.5bn. Other expenses came lower at Rs2.5bn vs Rs2.9bn in Q4. Mgt indicated that other expenses include ~Rs250-300m unabsorbed capex related to newly commissioned Singapore unit. The same is expected to be absorbed entirely by Q4FY20 as Singapore units gets attains fully occupancy with ramp-up on US and Australia supplies.
• Post Rs178m associate loss on Stelis /CHS business and Rs67mn exceptional charge, PAT came at Rs253m
• Maintained guidance of ~$240m US sales for FY20 despite recent WL in Puducherry. Expect 12-15 new approval in FY20.
• Net debt Rs7bn – post the Arrow transaction (including Rs4.5bn of deferred consideration). Announced Rs12/share dividend. Expect further free generation in the coming years with limited capex requirements. 

Impact on financials: Reduce FY20 earnings by 8% to account for delay in Australia transaction closure.

Valuations & view

Post a tough FY18, Strides has effected a fairly remarkable recovery in FY19 with the US sales growing from $21m in Q4FY18 to $56m in Q1FY20. While Puducherry WL is a setback, the financial impact is limited. With US sales growing sharply and crossing the profitability inflection point and other regulated markets also reaching a critical mass, the operating performance is set to improve further in coming quarters. Australia business exit is positive as it has meaningfully de-leveraged the balance sheet – a key investor concern. This should drive 27% CAGR growth in EBITDA over FY19-21E, despite Australia biz divestment. Maintain Outperformer with a target price of Rs582 (8x FY21E EBITDA).