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Strong growth; margin hit by higher costs

Strides Pharma Science (Strides) reported a steady Q4FY21 performance with strong revenue growth, although margin was impacted by higher logistics costs. Revenue grew 46.9% YoY to Rs9.1bn (I-Sec: Rs8.5bn) with strong growth across businesses and EBITDA margin improved 400bps to 17.5% (I-Sec: 19.8%) but Q4FY20 was a low base due to ranitidine ban. Sequentially EBITDA margin dropped 170bps due to higher logistics costs despite strong revenue growth. Exincremental costs, margin was strong at 20.3%. US grew 9.4% QoQ to US$58mn led by new launches and traction in existing products. The Board had approved the demerger Stelis Biopharma and the demerged entity would be listed separately which would unlock value in our view. Upgrade to ADD.

Strong revenue growth:

US revenues improved 9.4% QoQ US$58mn despite very weak flu season, driven by new launches and strong traction in existing products. Price erosion has accelerated and is likely to continue. Revenue from own US front continues to grow and now contributes ~87% of total US sales. We expect quarterly revenue run-rate to gradually increase to ~US$60mn+ in coming quarters driven by new launches. Other regulated markets grew strong 20.4% YoY aided by growth across UK, EU, Australia etc. Africa reported a growth of 67.8% YoY on a low base. Institutional business grew 132% YoY (+65% QoQ) led by commercialisation of product combination TLD. Regulated markets (US and EU) would be the key geographies for sustainable growth.

Margin to return to 19-20%:

EBITDA margin dropped 170bps QoQ to 17.5% due to higher S,G&A expenses on account of incremental logistics costs of Rs256mn. Adjusting it, margin would have been 20.3%. Gross margin improved 120bps QoQ with higher US sales. We expect gradual scale up in US business to provide additional operating leverage from the current levels that would be offset by investments towards future product pipeline. Hence, we expect the company to report EBITDA margin of ~19-20% in FY22E-FY23E.

Demerger of Stelis Biopharma: 

Board had approved the demerger and separate listing of Stelis Biopharma. Stelis is mainly engaged in biosimilars, CDMO of biopharma products and vaccine manufacturing. We believe demerger would help in unlocking shareholders’ value. Further, it has signed contract manufacturing agreement with RDIF for Sputnik V which will drive significant earnings in near term. We ascribe a value of Rs117/share for Strides’ 33% stake in Stelis.

Valuations and risks:

We lower EPS estimates by 1-4% for FY22E-FY23E to factor in higher logistics expenses. Considering recent fall in stock price that has made valuations reasonable, we upgrade the stock to ADD from Hold with a revised target of Rs906/share based on 17xFY23E EPS and Rs117/share for Stelis investment (earlier: Rs939/share). Key downside risks: Regulatory hurdles, delay in new launches and pricing pressures in the US.

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