Strides Pharma Q4FY22 results

Strides Pharma Science’s (Strides) Q4FY22 performance was above our estimates driven by strong recovery across business segments. Revenue grew 9.0% QoQ to Rs 8.7bn (I-Sec: Rs 7.8bn). US revenue grew 15.8% QoQ to US$44mn as against our estimate of US$36mn. Sequential improvement in gross margin coupled with operational leverage lifted EBITDA margin to 4.8% (+420bps QoQ). The company believes it can achieve US$250mn sales in the US in FY23 driven by new product launches (~20/year) including the integration of Endo Pharma portfolio. Strides has announced a series of steps to be undertaken in FY23, which include debt reduction (~Rs 10bn), inventory normalisation, cost reduction and unprofitable business exits. Recent correction in the stock price (~40% in past 6 months) has made valuations attractive, hence, we upgrade to BUY (from Reduce) with a revised target price of Rs 392/share (earlier Rs 360/share).

Business review: US revenue grew 15.8% QoQ to US$44mn led by incremental sales from Chestnut Ridge portfolio. We expect the quarterly revenue run-rate to gradually increase with new launches and complete integration of Endo Pharma from Jun’22. In other regulated markets, Strides witnessed 5.7% QoQ growth driven by healthy traction across key front-end markets and partnership business. Africa witnessed healthy traction with YoY growth of 23.5%. Institutional business was flat YoY, but grew 3.5% sequentially with steady offtake in partners. Favourable revenue mix aided 110bps improvement in gross margin sequentially. Operating leverage helped EBITDA margin improve 420bps QoQ. We expect EBITDA margin to improve from current levels (0.5% in FY22) to ~15% over the next two years.

Concall highlights: 1) Guided US$250m in US revenue in FY23, 2) intends to reduce gross debt by Rs 10bn in FY23 led by upfront payment from AUS partner (few months before the deadline) and internal accrual, 3) rationalise R&D investments in the US, 4) capex guidance of Rs 1bn/year and 5) Stelis Biopharma has appointed Frank Ternes as the Chief Business Officer (prior- Chief commercial officer at Recipharm).

Outlook: Expect FY23E to witness material improvement in the US business led by new launches and integration of Endo Pharma. Cost rationalisation, especially with logistics (due to high inventory levels at front-end warehouses) will support the EBITDA margin. Overall, we expect revenue CAGR of 17.3% over FY22-FY24E with EBITDA margin jumping to ~15%.

Valuations and risks: We raise our revenue estimates by 4-6% to factor in the strong growth in the US. We also raise our FY23E EPS by 48% on a low base and recovery in margins. However, we reduce our EPS estimate by ~6% for FY24E due to higher interest costs. Recent correction in the stock price (~40% in past 6 months) has made valuations attractive, hence, we upgrade to BUY from Reduce with a revised target price of Rs 392/share, based on 15xFY24E EPS (earlier: Rs 360/share). Key downside risks: Slowdown in recovery of US sales and regulatory hurdles.

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