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Regulated markets drive growth

Strides Pharma Science’s (Strides) Q3FY23 performance fell short of our revenue expectations, mainly due to negligible sales in the institutional business. Revenues grew 8.9% YoY (-3.6% QoQ) to Rs.8.7bn (I-Sec: Rs10bn). US sales were up 5% QoQ to US$63mn (I-Sec: US$60mn) driven by volume growth and traction in new product launches. Emerging market revenues fell 73.9% QoQ to US$6mn. Institutional business saw negligible revenues during the quarter due to expiry of contracts. Higher US sales contribution and several cost optimisation initiatives drove a 410bps QoQ EBITDA margin improvement to 13.5% (I-Sec: 11.6%). Company has guided toward a gross debt reduction of ~Rs10bn in FY23 and a ‘net debt/EBITDA’ ratio of <3 in the near term. Growth momentum in the US business, likely debt reduction and reasonable valuations make the stock attractive. Maintain BUY with a revised target price of Rs462/share (earlier: Rs500/share).

Business review:

US revenues grew 5% QoQ to US$63mn led by volume growth in the base business and healthy traction of the recent product launches. In other (ex-US) regulated markets, Strides saw a healthy recovery of 14.5% QoQ (+4.9% YoY) with improved volumes and new customer additions. Africa revenues fell 73.9% QoQ to US$6mn. Institutional business recorded negligible sales this quarter due to expiry of contracts. However, institutional business is expected to pick pace from Q1FY24 on commencement of new long-term contracts. EBITDA margin during the quarter expanded by 410bps QoQ to 13.5% driven by higher US sales and accrued benefit from several cost optimisation schemes. We expect EBITDA to further improve from current levels and gradually normalise to ~16% over the next two years.

* Concall highlights: 1) US: i)

Company has reduced its investment in R&D for this market. New products are to be launched from the existing ANDA pipeline. 2) Headcount reduction in the US will yield ~US$11mn of savings and is expected to fully reflect from Q1FY24. 3) Gross margin expansion to ~60-62% is targeted for FY24. 4) Company does not anticipate any more covid write-offs.

* Outlook:

We estimate revenue / EBITDA CAGRs of 14.3% / 36.1% with margins reaching ~16% over FY23E-FY25E. ‘Debt-equity’ ratio is expected to decline to ~0.7 by FY25E. Return ratios are likely to improve, but remain below 12%.

* Valuations and risks:

We cut our revenue estimates by ~6-7% over FY24-FY25E to factor-in the slower than estimated growth in Africa-branded and institutional markets. We further reduce our FY23E EPS by ~18% to take into account the lower ‘other income’. Maintain BUY with a revised target price of Rs462/share, based on 15x Sep’24E EPS (earlier: Rs500/share based on 15x Sep’24E EPS). Key downside risks: Slowdown in US sales, and regulatory hurdles.

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