Strides Pharma Science Ltd. share price target

Official action initiation report by USFDA on Puducherry plant (~7% of the total revenue of SS) was an unexpected event. The management is optimistic of transfer of production to other locations (5 of 6 products). US business grew by 31%QoQ driven by healthy performance in the base portfolio with no major price erosions and strong filing momentum (~21). Australian business saw a flat growth rate with a total of 18 new releases in FY19 while they received shareholders approval to exit Arrow investments which is expected to pay ~Rs1500cr upfront once effected....

With the recent acquisitions, additional 12-15 product launches and return of partnered products, we believe Strides can achieve US$ 215mn in US revenues for FY20E (a growth of 22% YoY). However, the management's guidance stands at US$ 240mn in US revenues for FY20E. The significant ramp up in the US to drive ~170bps EBITDA margin expansion over FY20-21. Additionally, the reduction in debt post Aus biz sell off will lead to annual savings of Rs 1.7bn in interest cost and amortization, and enable 5x YoY eps growth over FY21E. The US revival and earnings growth, along with an expected improvement in balance sheet, enable us to maintain our positive stance. We maintain BUY on Strides Pharma (STR) following a bumper 4QFY19 driven by US revival. Our TP is revised at Rs 570/sh (15x FY21E EPS + Rs 30/sh for biopharma) following a 9% cut in FY21E EPS to account for higher interest cost on elevated debt at Rs 31bn.

decline in sales, dragging growth to some extent. Gross margin (GM) shrank 280bp YoY to 53.5%. However, EBITDA margin expanded 500bp YoY to 18.9% (our estimate: 15.9%), led by a 230bp/560bp YoY reduction in employee/other expenses. Sequentially, both aforementioned expenses were stable, resulting in 280bp expansion in EBITDA margin. Loss in JV/associates hurts PAT: Higher interest cost (INR627m v/s INR501m QoQ/INR455m YoY) was offset by increased other income and extraordinary income (associated with forex gain and revaluation of investment)....

Strides Pharma science (SS) is a R&D; focussed, vertically integrated pharmaceutical company with an experienced management team and presence across multiple speciality therapeutic segments. SS to exit Australian business for ~394m AUD and a new supply deal will be struck in its place with Arrotex (Arrow- Apotex merged entity). More focus to the US markets as they are witnessing strong business momentum driven by new product launches. Regulated market saw high growth rate (55% YoY) driven by better...

Maintain BUY with a TP of Rs 585 (15x Dec-20E EPS + Rs 30/sh for biopharma). Strides reported a good set of numbers with revenue at Rs 7.9bn, up 6/8% YoY/QoQ and 5% ahead of our estimates. Revenue growth was largely driven by scale up in the US business. EBITDA came in at Rs 1.2bn with margin at 16%, down 150bps YoY and up 240bps QoQ. The sequential margin expansion was on account of higher US sales; consistent with our expectation. Reported PAT at Rs 2.9bn (+236% YoY) includes a one-time payment related to Mylan deal. Adjusting for which, PAT was 22% ahead of our estimates at Rs 239mn.

Strides Pharma (STR) has decided to sell its entire stake in Arrow (Australian business) to Apotex for a consideration of AUD394m (US282m). The stake sale -which implies an attractive valuation of 19x EV/EBITDA - would enable STR to reduce its debt by at least USD160m.

Strides Shasun (SS) is a R&D; focussed, vertically integrated pharmaceutical company with an experienced management team and presence across multiple speciality therapeutic segments. Q2FY19 revenue grew by 10% QoQ due to higher sales growth in the US(~27%) and good performance from Africa (49%QoQ). Australian and Regulated markets witnessed healthy growth of 12%&52% (YoY) led by steady margins and better pricings. Change in partnership model in the US (generic) will further improve...

Maintain BUY with a TP of Rs 480 (15x Sep-20E+ Rs 30/sh for biopharma). Strides continued to gain traction in the US and other regulated markets, which offset the further slump seen in the institutional business as compared to the previous quarter. Revenue was reported at Rs 7.3bn, down 4.7% YoY/ up 10.4% QoQ. EBITDA at Rs 996mn saw a sequential jump of 23% with margin at 13.6% (up 142bps QoQ).

A significant debt reduction, if achieved, over the next two years could play a vital role in improving valuation multiple with peers trading at over 1.5x price/sales. Solara Active Pharma Sciences (Solara) was incorporated in February 2017. The select API business of Strides Shasun and Human API business of SeQuent were demerged from their parent companies and merged to form Solara, which is operating as a Pure Play API manufacturing company. This brings Solara over three decades of experience in the API business.

Upgrade to BUY with a TP of Rs 480 (15x FY20E+ Rs 30/sh for biopharma). Improved performance in US was the key takeaway from Strides 1QFY19 result, although overall operational numbers remained weak. Revenue at Rs 6.6bn was flat YoY and QoQ. EBITDA margin was weak too at 12.2% v/s 13% in 4QFY18. The company reported loss of Rs 42mn in 1QFY19; sticky depreciation and interest cost to the tune of Rs 860mn eroded the profits.