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Steady quarter; Stelis to demerge

Strides Pharma Science (Strides) reported a steady Q3FY21 performance, though reduction in export incentives and continued losses in JV/associates impacted net profit. Revenue grew 13.6% YoY to Rs8.3bn (I-Sec: Rs8.2bn) with strong growth in other regulated markets, EBITDA margin declined 550bps to 19.2% (ISec: 19.9%) and adjusted PAT declined 39.7% YoY to Rs475mn (I-Sec: Rs601mn). US declined 1.9% QoQ to US$53mn due to weak flu season. The Board has approved the demerger of biotech business under Stelis Biopharma and the demerged entity would be listed separately. We believe this would help in unlocking the value for shareholders as currently it contributes negatively to consolidated profit. Retain ADD with a revised target price of Rs939/share.

* Revenue growth steady:

US revenues marginally declined QoQ to US$53mn mainly due to weak flu season which impacted sales by ~US$5mn and price erosion in select products. Revenue from own US front has continued to grow and now contributes ~86% 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 36.9% YoY aided by growth across UK, EU, Australia etc. Africa reported a growth of 117% YoY (-23.4% QoQ). Institutional business grew 224% YoY (+25.1% QoQ) on a low base. The regulated markets (US and EU) would be the key geographies for sustainable growth.

* Margin to sustain around 20%:

EBITDA margin dropped 60bps QoQ to 19.2% due to loss of export incentives after change in government scheme in Sep’20. This also impacted gross margin by ~1.5%. We believe gross margin would now stabilize around 59% vs 60%+ earlier. 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 ~20% in FY21E-FY23E.

* Demerger of Stelis Biopharma:

Board has in-principle approved the demerger and separate listing of Strides’ biotech business under Stelis Biopharma. Stelis is mainly engaged in biosimilars, CDMO of biopharma products and has recently built capacity for vaccines (500mn doses of liquid vaccines). Stelis currently negatively affects consolidated profit by ~Rs700mn but is expected to break-even by FY22. Strides has ~54% stake in Stelis and has cumulatively invested US$75mn. We believe demerger would help in unlocking shareholders’ value.

* Valuations and risks:

We largely maintain revenue estimates but lower EPS estimates by 2-13% to factor in reduced export incentives and slower pick-up in US sales. Maintain ADD on the stock with a revised target price of Rs939/share based on 18xFY23E EPS and Rs63/share for Stelis investment at book value (earlier: Rs822/share). Key downside risks: Regulatory hurdles, delay in new launches and pricing pressures in the US.

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