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EBTDA breakeven in 3QFY22

Work in progress to enhance its sales prospects across key markets

* STR delivered in line revenue in 3QFY22. Compared to operational loss in the previous two quarters, it saw a break even at the EBITDA level in 3QFY22. The escalated raw material cost kept EBITDA under check.

* With traction in the drug product business, Stelis has achieved an EBITDA breakeven in 3QFY22. Customer addition is providing business opportunities starting from FY23.

* We have cut our FY23E/FY24E EPS estimate by 14%/9%, factoring in: a) increased raw material cost, b) rising logistics cost, c) gradual stability in volumes in the US Generics segment, and d) ongoing impact of the price erosion in the base business.

* We value STR on a SoTP basis, with an EV/EBITDA of 7x/8x for its regulated/emerging markets, 5x for the Institutional segment, and add investment value for its 33% stake in Stelis (recent conclusion of Series B/C funding pegged at a post money valuation of USD350m) to arrive at our TP of INR450. We maintain our Buy rating.

Operational loss reduces considerably on a QoQ basis

* Revenue fell 5% to INR7.9b (est. INR8b) in 3QFY22 due to continued headwinds in the US.

* Sales in the US sales fell 27% YoY to INR2.8b (36% of sales). Sales in other regulated markets were flat YoY at INR3b (38% of sales). Sales in emerging market sales rose 41% YoY to INR2.1b (26% of sales).

* Gross margin contracted by ~840bp YoY to 49.7% due to changes in the product mix and higher RM cost.

* EBITDA margin contracted by 1,860bp YoY to reach near breakeven at the EBITDA level (our margin estimate: 5.7%) due to low operating leverage.

* EBITDA declined by 97% YoY to INR46m (est. INR447m).

* STR recorded an exceptional loss of INR154m on account of forex loss, sales returns, impairment on disposal of its facility, and restructuring expense.

* Adjusting for the same, STR reported a loss of ~INR1.1b (est. -INR534m).

Highlights from the management commentary

* With a quarterly US sales base of USD38m, addition of the Endo portfolio and launches, STR is confident of achieving USD250m in revenue in FY23.

* Gross margin stood at 51% and is expected to stay subdued with high cost raw material inventory still available to be used. However, STR expects the same to return to 55% from FY23 onwards after the reduction in inventory.

* USFDA inspection was successfully completed at the Chestnut facility, with two minor observations.

* Stelis delivered INR618m in revenue and an EBITDA margin of 8%. It has onboarded five new customers, which have a strong commercial business value that will start translating into revenue from FY23 onwards.

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