Strides Pharma Science - Steady quarter; growth to pick up - ICICI Securities

Strides Pharma Science (Strides) reported a healthy Q2FY21 performance largely in-line with our estimates. Revenue grew 11.0% YoY to Rs7.9bn (I-Sec: Rs7.9bn) with growth across geographies, EBITDA margin declined 70bps to 19.8% (I-Sec: 20.2%) and adjusted PAT declined 7.5% YoY to Rs498mn (I-Sec: Rs554mn). US grew 8.0% QoQ to US$54mn supported by new launches and growth from its own front end. Other markets (EU, EM and institutional) continued to scale-up. We believe US market would grow 9.8% CAGR over FY20-FY23E and company's consolidated EBITDA margin would sustain levels around 20-21%. Minimal capex requirement and healthy operational performance would help in generating FCFF of ~Rs13bn over FY21E-FY23E. Retain BUY.

- Growth across geographies: US revenues improved 8.0% QoQ to US$54mn led by new launches and ~25% growth from its own front end which now contributes ~85% of total US sales. Growth has reduced in the current quarter owing to price erosion in the business and subdued demand for few products. We expect quarterly revenue run-rate to increase to ~US$60-65mn in coming quarters driven by new launches from several products that are pending approval. Supplies to Arrowtex in Australia were impacted with shutdown of its dedicated plant due to COVID-19, however, it has become fully operational now. Overall, other regulated markets grew 7.5% YoY. Africa reported a growth of 117% YoY (+20.6% QoQ). Institutional business grew 18.0% YoY (-13.3% QoQ). The regulated markets (US and EU) would be the key geographies for sustainable growth.

- Margin to sustain at 20-21%: EBITDA margin improved 50bps QoQ to 19.8% driven by operating leverage in the US market where growth from own front end was strong. Gross margin was flattish QoQ but improved 290bps YoY to 61.1% better than estimated 60%. We expect scale up in US business to provide additional operating leverage from the current levels that would be offset by investments towards future product pipeline. Hence, we expect the company to report EBITDA margin of 20-21% in FY21E-FY23E with gross margin of 60-61%.

- Outlook: We expect a 9.8% CAGR in US sales over FY20-FY23E led by 10-15 new launches every year and improving market share and EU to grow at 11.6% over FY20-FY23E with entry in newer markets and new product launches. Overall, expect revenue and earnings to CAGR at 13.3% and 59.0% respectively over FY20-FY23E. Expect return ratios to remain muted with continuous investments in Stelis Biopharma which that would turn profitable in H2FY22.

- Valuations and risks: We marginally revise our estimates to reflect current quarters performance. Maintain BUY on the stock with a revised target price of Rs776/share based on 17xSep'22E EPS (earlier: Rs773/share). Key downside risks: Regulatory hurdles, delay in new launches and pricing pressures in the US.

Shares of Strides Pharma Science Ltd was last trading in BSE at Rs.689.6 as compared to the previous close of Rs. 672.5. The total number of shares traded during the day was 92354 in over 3571 trades.

The stock hit an intraday high of Rs. 702.8 and intraday low of 658.25. The net turnover during the day was Rs. 62833970.

Source : Equity Bulls

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