Strides Pharma Science's Q3FY19 results (Outperformer) - Exits Australia to deleverage; US gains momentum
Q3FY19 result highlights
- Cons. revenues came in at Rs7.9bn (+8% qoq), above est of Rs6.8bn led by higher US at $41m vs est of $37m ($32m in Q2) and “Other regulated markets” at Rs1.25bn vs est of Rs1bn. Institutional sales stayed weak.
- GMs stood lower at 51.8% (flat sequentially) vs est of 55% while SG&A cost stood inline at Rs2.8bn. EBITDA came in lower at Rs1.27bn vs est of Rs1.4bn with at 16% (13.6% in Q2) vs est of 18.4%.
- Continuing business PAT was Rs239mn vs our est of Rs439mn impacted by higher minority cost of Rs70mn vs est of Rs50mn and lower other income of Rs8mn vs est of Rs75mn.
- Restructuring – Strides has sold its Australian business for AUD 393m. Business will now be focussed on US and “Other regulated markets”. Strides will continue to make 15-20m AUD annual EBITDA through its 10 year supply arrangement with Arrow-Apotex. Strides also announced two US generic acquisitions with ~$40m annual revenues from FY20 onwards.
- 300m AUD upfront proceeds will sharply reduce consolidated debt to ~Rs10b from ~Rs20bn earlier. Further, Strides will also receive 93m AUD balance proceeds. We est that reduction in interest / amortization cost post Australian biz exit should effectively neutralize the EBITDA loss.
Key positives: Higher US and other regulated business; debt reduction, African business break even
Key negatives: Lower institutional sales and lower GMs
Impact on financials: We have cut our FY19/FY20/FY21 EBITDA estimate by 7% each. FY19 earnings reduced by 36% while FY20/21 upgraded by 17% and 6% due to lower interest costs.
Valuations & view
Post a tough FY18 given unexpected growth issues in the US, Strides has effected a fairly remarkable recovery over the last three quarters. Australia business exit, while unexpected, is positive as it meaningfully de-leverages the balance sheet – a key investor concern. Further, with US sales nearly doubling over this period and crossing the profitability inflection point, the operating performance is set to accelerate in coming quarters with expansion in US / other regulated market sales. This should drive 29% CAGR growth in EBIDTA over FY19-21e, despite Australia biz divestment. Further, Strides has significant option value in form of the potential exclusivity for its $400m CGT product as well as its Stelis portfolio. Maintain Outperformer with a target price of Rs680 (9x FY21e EBITDA).
Strides Pharma Science Ltd, formerly Strides Shasun Limited, is a vertically integrated global pharmaceutical company. The Company is engaged in the development and manufacturing of active pharmaceutical ingredients (APIs) and formulations, as well as biotech. Its business segments include Pharmaceutical and Biotech businesses. Its geographical segments are Africa, Australasia, North America and Europe, South and Central America, India and Others. The Company focuses on developing complex pharmaceutical products across therapeutic segments. The Company's products include general tablets, hard gelatin capsules, soft gelatin capsules, sachets, dry powders, dry syrups, potent drugs, semi solids, ointments and creams. It is also involved in supplying generics to hospitals approved by the National Health Service (NHS) and over-the-counter (OTC) products through retail outlets. It operates approximately 10 facilities, which are diversified across Asia, Africa and Europe.
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