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ANDA launches and other regulated markets to sustain better prospects

? STR delivered an in line revenue in 1QFY23. However, there has been an uptick in the margin on a sequential basis. The spillover of revenue for the US market to 2QFY23 and currency headwinds in other regulated markets (OTR) resulted in a lower than expected EBITDA margin in 1QFY23.

? We value STR on a SoTP basis, with an EV/EBITDA of 9x for its regulated and emerging markets, 6x for its Institutional segment, and add an investment value for its 33% stake in Stelis Biopharma to arrive our TP of INR380. We maintain our Buy rating.

Better sales and controlled cost keep margin on an uptrend

? Revenue rose 36.6% to INR9.4b (est. INR9.1b) in 1QFY23, driven by a recovery across business segments.

? US sales grew 18% YoY to INR3.6b (38% of sales). Other regulated market sales rose 37% YoY to INR3b (32% of sales). Emerging market sales rose 2x YoY to INR2b (21% of sales).

? Gross margin (GM) expanded by ~50bp YoY to 49.8%.

? EBITDA margin stood at 5.4% (est. 6.9%), and has been on an uptrend for three quarters now.

? STR reported an EBITDA of INR512m (est. INR627m) as against an operating loss in 1QFY22.

? It recorded an exceptional loss of INR658m on account of forex loss, product recalls, and restructuring expenses.

? Adjusting for the same, STR reported a loss of ~INR934m (v/s our estimated loss of INR301m).

? Stelis Biopharma incurred a loss of INR1.3b in 1QFY23. It has a net negative working capital position amounting to INR4.1b.

Highlights from the management commentary

? STR reiterated its US Generics sales guidance of USD250m for FY23.

? The EM business is expected to grow by 35% YoY in FY23, driven by new contract supply agreements.

? In 9MFY23, it has planned 15 product launches in the Endo portfolio.

? STR currently has 50-60 potential profitable products out of its existing approved portfolio targeted for US launch.

? Stelis Biopharma has a COVID-related inventory of INR2.8b and is facing challenges in liquidating the same, given the sanctions imposed on Russia.

? STR remains confident of reducing net debt by INR10b, through realization of funds from the Arrow transaction, normalization of inventory, exiting low margin businesses, and by optimizing its manufacturing operations.

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