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Healthy sequential growth across geographies

Strides Pharma Science (STAR) is an R&D focussed, vertically integrated pharmaceutical company with an experienced management team having presence across multiple therapeutic segments.

• Strides reported its Q4FY22 revenue at Rs.866cr (9% QoQ, -4.7% YoY), with the US business (38% of total revenue) clocking 17% QoQ growth.

• Unusual price erosion and volume drops in the US led to contraction in EBITDA (-73.4% YoY) to Rs.42cr with EDITDA margin contracting 430 bps QoQ.

• Stelis Biopharma revenues were reported at $17.7mn (from a zero base) in FY22, securing commercial sales value of $85mn starting FY24.

• We expect a revenue CAGR of 20% over FY22-FY24E on the portfolio expansion, healthy order book, better cash flows and focus on debt & cost reduction.

• Hence, we reiterate our “Accumulate’ rating based on 14x FY24E EPS at target price of Rs.355.

Growth across segments

Strides reported its Q4FY22 revenues at Rs. 866cr (9% QoQ, -4.7% YoY) as growth was recorded across all segments. EBITDA contracted to Rs.42cr (-73.4% YoY) as unusual price erosion and volume drops weighed on margins. There was a 16% increase in employee cost, operating cost and other expenses. Air and sea freight cost witnessed a significant increase to Rs.75 cr from Rs.60 cr in Q3FY22. Owing to the inventory build-up due to weaker off-take, there was a significant increase in working capital cycle. Resultantly, Adj PAT was recorded at Rs.107cr. Revenues from the US (38% of total revenue FY22) market improved sequentially led by incremental contribution from the Chestnut Ridge portfolio whereas the Africa business reported a 24% YoY growth as the severity of covid was low in the country. In Q4FY22, the other regulated markets clocked its highest quarterly run rate with revenues at Rs.313.3cr despite covid challenges.

US business to drive future growth

Strides expects the recovery in the US business led by new product launches and maintain the growth in other regulated markets through new product approvals and client acquisitions. Strides plans to reduce its debt by Rs.1000 cr by the end of FY23 through realization of deferred consideration. Normalization of inventory levels in the US will lead to superior free cash flow generation. The company also plans to exit small businesses that do not move the needle in terms of revenues and EBITDA which in turn will help in reducing debt. Consequent to the Chestnut Ridge acquisition, Strides adds new capabilities in hormones, controlled substances and nasal sprays.

Stelis growth in FY23 Stelis

Biopharma reported revenues of Rs.1.7 (from a zero base) through manufacturing services agreement, The company has onboarded 6 clients in its first year with another 6 clients in the first three months of this quarter. Stelis’ vaccine AmbiVax, which is in-licensed from Akston Biosciences, has completed the full dosing of its phase three patients in India.

Outlook and valuation

Strides continues to witness healthy sequential growth momentum despite various headwinds. Going forward, the company plans to focus on growth and profits and improve cashflows but also significantly reduce costs and debt. New launches in the US market and exiting non-profitable business will support earnings. Outlook for the other regulated markets continues to remain robust given strong order book visibility and new customer acquisition. Going forward, lower debt, higher cashflow and new portfolio contribution will be key catalysts. Hence, given our positive outlook, we reiterate our ‘Accumulate” rating based on 14x FY24E EPS and target price of Rs.355.

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