Strides Pharma Science's Q3FY20 results (Outperformer) - Strong quarter ledby US despite weakness in EMs
Q3FY20 result highlights
- Consol Revs came at Rs7.3bn vs est of Rs7.4bn; Q2 was Rs7.2bn. US revs posted a strong CC growth of 16% qoq to $66m vs est of $60m partially boosted by relaunch of Ranitidine, and seasonal products such as Benzonatate and Oseltamivir
- Other regulated markets stood at Rs2.2bn vs est of Rs2.1bn, largely due to delivery spillover of key products in EU and Australia. Emerging markets business came sharply lower at Rs566m vs est of Rs1bn due to a reduced demand in old regimen products
- EBITDA and GPs higher than est led by boosted GMs - EBITDA came at Rs1.8bn vs est of Rs1.5bn; EBITDAM 24.9% vs est of 20.7%. With a higher proportion of US business, GMs came sharply higher at 64.4% vs est 58% (Q2: 58.2%); GPs of Rs4.7bn vs est of Rs4.3bn (Q2: Rs4.2bn). We anticipate gRantidine has significantly aided margins
- Post Rs234m associate loss on Stelis/CHS business, adjusted PAT came at Rs767m vs est Rs523m. Strides also booked of Rs156m exceptional income
- Maintained guidance of $220-240m US sales for FY20 despite WL in Puducherry. Reinspection expected in Q4FY20 or early Q1FY21
- Net debt Rs10.8bn – increased by Rs1bn qoq due to capital employed in Biotech and CHC and increased working capital requirements with growth of US front end.
Impact on financials: Broadly maintain FY20/21 earnings estimates. We introduce FY22 earnings
Valuations & view
Post dismal FY18, Strides has effected a dramatic turnaround over last 5-6 quarters with US sales growing from $21m in Q4FY18 to $66m in Q2FY20 and now seems well placed to build on this success. The stock could create significant value over the medium term, provided the company delivers on its 3-4 year guidance. The operating performance is set to improve further in coming quarters with the crossing of the profitability inflection point and other regulated markets also reaching a critical mass. While opportunistic business divestments will continue to be an integral part of Strides’ business model, management is focussed on creating a profitable cash-generating business platform versus continuing on a perennial investment mode (as in the past). We are positive on Strides’ value-creating potential from its current valuations of ~US$720m EV (6.5x FY21E EBITDA). Maintain Outperformer with a target price of Rs673 (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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