Strides Shasun's Q4FY18 results (Outperformer) - Weak quarter led by US sales miss

Q4FY18 result highlights

• Cons. revenues came in sharply lower at Rs6.6bn (-2%/11% yoy/qoq), below est of Rs7.7bn. Sharp qoq drop in US sales at $21m vs $42m was the primary negative surprise along with lower institutional sales. This negated the strong growth in Australia and other developed markets.
• Mgt attributed lower qoq US sales to nearly nil sales in its 2 key partnered drugs e.g. gLovaza and gPotassium Chloride. This was on account of significant pricing pressure and lower than expected market share leading to elevated inventory levels. Given profitability / control challenges with partnership arrangements in current US generic scenario, Strides will henceforth sell drugs through its front-end only. However, the impact is likely to be visible only from H2FY19 onwards.
• Led by lower revenues, reported EBITDA came in significantly lower   at Rs0.87bn (-33% yoy) vs est of Rs1.43bn. EBITDA margins came at 13% below our est of 18.5%. GMs came at 55.9% vs 53.3% in Q3.
• Depreciation stood higher at Rs443mn (+17% qoq) vs est of Rs389mn. Consequently continuing business PAT reported a loss of Rs44mn vs profit of Rs463mn in Q3FY18 and vs our est of Rs630mn.

Key positives: Higher Australian business revenues and profitability

Key negatives: Sharply lower US sales; weak institutional / Africa revs

Impact on financials: We have reduced FY19/FY20 EBITDA by 20%/19% and earnings estimates by 51%/41%

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 the company seeks to recalibrate 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. 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 reduced TP of Rs613 (11xEV/EBITDA (FY20e).