Strong revival in earnings led by Other Regulated / Africa
Superior execution leads to recovery in US sales for the quarter
* After posting adjusted loss of INR274m in 4QFY20, Strides Pharma (STR) made a strong comeback in 1QFY21 with adjusted PAT of INR560m. This was on account of strong traction witnessed in the US / Other Regulated / Africa markets.
* We increase our EPS estimate for FY21/FY22 by 19.6%/14.2% to factor a strong ANDA pipeline for the US market, good order-book visibility for the Other Regulated market, revival in Africa sales, and improved operating leverage. We roll our price target to INR650 on a 12M forward SOTP basis. We remain positive on STR on the back of considerable improvement expected in return ratios over FY20–22 and attractive valuations. Maintain Buy.
Strong beat on earnings led by traction in US / Other Regulated
* STR’s 1QFY21 revenues were up 14% YoY to INR7.8b (est: INR6.5b).
* Other Regulated sales were up 53% YoY to INR2.6b (33% of sales). Emerging Markets sales rose 17% YoY to INR1.5b (19% of sales).
* US sales fell 4% YoY to INR3.7b (48% of sales). Excluding Ranitidine sales in 1QFY20, YoY growth was 8% for the quarter.
* The gross margin (GM) expanded 740bp YoY to 61%, led by a better product mix. However, the EBITDA margin expanded at lower rate of 130bp YoY to 19.3% on higher opex (employee cost +245bp YoY; other expenses +370bp YoY as % of sales).
* EBITDA for the quarter was up 22% YoY to INR1.5b (est: INR1.1b).
* STR reported exceptional gains of INR490m related to exchange rate on foreign currency loans, derivatives, deferred considerations, and intra-group loans.
* Adjusting for the same, PAT was up 59% YoY to INR560m (est: INR290m).
Highlights from management commentary
* While STR continues to gain market share in existing products, new launches would enable it to achieve sales of ~USD240m in the US for FY21 (compared with USD50m for 1QFY21).
* STR has guided for 6–8 ANDA launches for FY21.
* It has completed remediation measures, verified from third-party consultants, and awaits clarity from the USFDA regarding an inspection.
* The growth prospects in Other Regulated remain promising on the back of enhanced product offerings as well as reach.
* Net debt was INR10.1b at the end of 1QFY21.
Valuation and view
* We expect a strong 72% earnings CAGR over FY20–22, led by a 23% sales CAGR in Other Regulated and a 52% sales CAGR in Emerging Markets, supported by 140bp margin expansion.
* We increase our earnings estimate by 19.6%/14.2% for FY21/FY22 to factor superior execution across the markets and better operating leverage. We roll our price target to INR650 on a 12M forward SOTP basis (8x EV/EBITDA for the US / Other Regulated markets, 6x for Emerging Markets, and 5x for Institutional). Given the strong earnings trajectory and attractive valuation, we maintain BUY on the stock.
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