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Regrouping CDMO pieces to unlock value

Strides Pharma (Strides) is streamlining its CDMO business by merging its soft gel capsule business and injectable business of Steriscience with Stelis. It will also rename Stelis to OneSource after completion, and regrouping will help the promoter better align the focus on all the arms of the CDMO business. The combined entity is likely to have revenue of USD 180-200mn in FY25E and management expects to grow 20-25% p.a. thereon. In the near term, injectable and soft gelatin businesses may drive growth while biologic business is likely to boost growth from FY26E. The regrouping factors a premium valuation of 17x FY24 EV/EBITDA for soft gel business, 15.7x for generic injectable business and INR 29.2bn for the existing business of Stelis. We maintain our estimates for FY24E and FY25E. The stock has run-up 20% since Q1FY24 result. We lower our rating to REDUCE (from Hold) though we revise our target price to INR 495 (INR 460 earlier) on 15x FY25E earnings ( earlier: INR 460 based on 14x FY25E EPS),

Strides shareholders to own 44% stake in new entity

As per the arrangement, Stelis will cease to be an associate company of Strides (currently 29.93% stake) and the shareholders of Strides will be issued new shares of Stelis (OneSource). Further, Strides will also issue 1 new share of OneSource for 2 shares of Strides for the transfer of oral soft gelatin business. Each share of Steriscience to fetch 1,515 shares of OneSource.

Multiple growth drivers for CDMO business

According to management, OneSource is likely to have revenue of USD 140- 150mn and margin of ~25% for FY24E and revenue of USD 180-200mn and ~30% margin for FY25E. Strides has on boarded some customers for its soft gel business, which along with sterile injectables may be the primary growth driver till FY26 post which its high-end drug device combinations in GLP-1 products (currently under Stelis) may aid growth and margins

Reconfiguration to not hit Strides materially

Soft gel business is likely to account for 13.6% of revenue and 22.4% of EBITDA of Strides in FY24E. Regrouping may require approval from shareholders and regulators and is likely to take 12-15 months for completion. Strides management has maintained its absolute EBITDA guidance of INR 7,000- 7,500mn for FY24 and is confident of achieving over INR 7,500mn in FY25 even after demerging the soft gel business. Net debt under Strides is likely to be reduced by USD 35mn; it targets to achieve debt/EBITDA of under 2.5x by FY25.Key upside risks: Ramp up in institutional business and product launches

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