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US/Institutional business drives earnings

Work-in-progress to build a basket of COVID-19 products

* STR’s 4QFY21 operational performance was marginally below our estimate. The robust performance in the US/Institutional segment within emerging markets was offset by subdued sales in other regulated markets on account of COVID-19. In addition to commercial manufacturing of the Sputnik vaccine by Oct’21, STR is building a basket of COVID-related medicines. The ANDA filing momentum is expected to pick-up in FY22, providing growth visibility in the US market.

* We cut our FY22E/FY23E earnings estimate by 6% each to account for increased opex associated with logistics and increased price erosion in select products. We value STR on a 12-month forward SoTP basis – EV/EBITDA of 12x/7x/6x for the Regulated/Emerging Markets/Institutional segment – to arrive at our TP of INR930/share. Maintain Buy.

Inferior product mix was more than offset by lower opex in 4QFY21

* Revenue grew 47% YoY to INR9.1b (est: INR8.5b) in 4QFY21.

* Emerging market sales more than doubled (107% growth) YoY to INR2.1b (23% of sales). US sales grew 46% YoY to INR4.3b (47% of sales). Other regulated market sales were up 20% YoY at INR2.7b (30% of sales).

* Gross margin contracted 100bp YoY to 59.1% due to inferior product mix. However, EBITDA margin expanded 400bp YoY to 17.5% (est: 19.7%) due to lower employee cost and other expenses (-310bp/-190bp as a percentage of sales). EBITDA grew 90% YoY to INR1.6b (est: INR1.7b).

* Adjusting for the forex loss and exceptional item, PAT stood at INR470m (est: INR706m).

* STR recorded a loss of INR198m in the Biotech and CHC segment in 4QFY21.

* Sales/EBITDA/adjusted PAT rose 21%/17%/43% YoY in FY21 at INR33.2b/INR6.3b/INR2b.

Highlights from the management commentary

* With US sales of USD215m in FY21, STR remains confident of achieving annual sales of USD400m over the next three years. There could be nearterm hiccups on account of the ongoing pandemic.

* Stelis Biopharma (Stelis) has started validation of batches, which should conclude by Jun’21. It expects to launch the Sputnik V vaccine by Oct’21. Typically the validation-to-commercial batch scale is 1:10x.

* The funds raised at the Stelis level (USD125m) would be utilized for last mile capex related to the CDMO business, including setting up a 6KL mammalian block, and ramping up of process development and other technical capabilities. The usage of funds would be completed in FY22.

* STR holds 33% stake in Stelis post completion of the Series C funding.

* It witnessed a considerable QoQ increase in opex (INR1.3b) in 4QFY21 due to rise in freight cost and supply disruption on account of COVID-19.

Valuation and view

* We cut our FY22E/FY23E earnings estimate by 6% each to reflect increased competition in select products, leading to lower realizations, near term impact of COVID-19 on the performance of other regulated markets, and increased operational cost related to freight and supply chain management.

* We expect 51% earnings CAGR over FY20-23E, led by 9%/22%/37% sales CAGR in the US/OTR/EM, supported by 230bp margin expansion.

* We roll our TP to INR910/share on a 12-month forward SoTP basis (EV/EBITDA of 12x/7x/6x for the Regulated/EM/Institutional segment). We remain positive on STR on the back of its healthy ANDA pipeline, better traction in other regulated markets, and new launches led improved order book for the Institutional business. Maintain Buy.

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