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Strides Shasun's Q3FY18 results (Outperformer) - Weak quarter; Institutional segment drags

Q3FY18 result highlights

• Cons. revenues came in at Rs7.5bn (-3% qoq), below est of Rs8.9bn led by lower EM / Institutional biz revenues at Rs1.69bn (-19% qoq) vs est of Rs3.2bn. Regulated markets revenues came at Rs5.8bn (+29% qoq) vs inline with est of Rs5.8bn.
• Led by lower revenues, reported EBITDA came in significantly lower   at Rs1.3bn (-13% yoy) vs est of Rs1.7bn. EBITDA margins came at 16.4% below our est of 19%. GMs at 53.3% (49.6% in Q2) were inline with our est. EBITDA was impacted by ~120mn (vs ~161mn in Q2) on account of the investment made in the consumer healthcare business. 
• Other income stood lower at Rs157mn (-30% qoq) vs est of Rs300m. Tax rate stood negative for the quarter. Consequently continuing business PAT came at Rs466mn vs est of Rs1bn.
• Strides has now begun to report financials on a continuing business basis, treating PSAI segment (soon to be demerged) and Indian operations (divested in Q3) as discontinued business.

Key positives: Inline regulated market revenues and GMs

Key negatives: Sharply lower institutional revenues and other income

Impact on financials: We have reduced FY18/FY19 EBITDA by 17%/13% and PAT estimates by 30%/19% and introduced FY20 estimates

Valuations & view

Over the last few quarters, Strides 2.0 has fine-tuned its business model to enhance focus on key geographies of US and Australia formulations. Recently announced corporate actions will create a more focussed, profitable B2C business model with reduced leverage and results should steadily become visible over the next few quarters. Given the high depreciation / interest charges, the expected pickup in EBITDA growth will drive accelerated earnings growth from FY19 onwards. While FY18 earnings have disappointed, we remains positive on the growth potential of the new entity. Maintain Outperformer with a TP of Rs976 (17x FY20E plus Rs104/share value for the stake in the demerged PSAI entity).