Strides Shasun's Q1FY19 results (Outperformer) - In a rebuilding phase
Q1FY19 result highlights
- Cons. revenues came in at Rs6.6bn (flat qoq; +1% yoy), marginally above est of Rs6.5bn. US came at $26m vs est of $24m ($21m in Q4). Australia stood lower at Rs2.3bn (-14% qoq) vs est of Rs2.6bn and Africa came in at Rs397mn vs est of Rs550mn. Institutional business was higher at Rs1.3bn vs est of Rs0.9bn as the company sought to meet its contractual obligations and is expected to decline going forward.
- EBITDA came in lower at Rs0.81bn vs est of Rs1.02bn. EBITDA margins came at 12.2% below our est of 15.7% led by lower GMs of 48.7% (est of 56.5%) vs 55.9% in Q4. Mgt indicated that this GM squeeze was driven by cost pressures in fulfilling prior commitments in the institutional biz. The same is expected to ease going forward. Other expenses came lower at Rs1.36bn vs Rs1.79bn in Q4
- Tax came negative at Rs43mn. Continuing business PAT was Rs8mn vs our est of Rs240mn. Reported loss post exceptional stood at Rs41mn
- Management reiterated guidance of meaningful pick up in US business from H2FY19 onwards. This combined with improvement in institutional business profitability (but with lower sales) and overhead cost controls should drive sharp operating leverage.
Key positives: Higher US and institutional business
Key negatives: Lower Australian sales and Africa revs; lower GMs
Impact on financials: We have maintained our FY19/FY20 estimates
Valuations & view
Strides has had a tough FY18 (with Q4FY18 being particularly weak) given the unexpected growth issues in US as well as losses in CHC business. As Strides recalibrates its strategy in markets like US, we believe that H1FY19 will likely be soft but business should begin to regain momentum from H2FY19 onwards as the US pipeline begins to deliver. Q1 results are broadly in-line with these expectations. Given the high depreciation / interest charges, EBITDA growth pickup (on a low base of ~$60m in FY18) can drive accelerated earnings growth from H2FY19 onwards. While FY18 earnings have disappointed, we remain positive given Strides’ strong position in Australia and growth potential of its US business. Maintain Outperformer with TP of Rs613 (11xEV/EBITDA (FY20E)
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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