A better quarter with higher revenue from the US …We are lowering our FY20/21 revenue estimate downward by 2.7% and 2.4% respectively to factor immediate loss of revenue from Puducherry plant. However we believe that Strides can achieve a ~18% YoY growth in the US given good filing momentum and new launches. We are also adjusting our FY20/21 PAT estimate downward by 15% and 7% respectively to factor lower other income and muted profit share from JV/ Associates. We value Strides at 15x on FY21E EPS and downgrade the rating to Reduce from ‘Buy’ to factor uncertainty around the USFDA outcome as well as the Arrow exit deal.
US continues to perform We maintain BUY on Strides Pharma (STR) following a bumper 4QFY19 driven by US revival. Our TP is revised at Rs 570/sh (15x FY21E EPS + Rs 30/sh for biopharma) following a 9% cut in FY21E EPS to account for higher interest cost on elevated debt at Rs 31bn. STANCE With the recent acquisitions, additional 12-15 product launches and return of partnered products, we believe Strides can achieve US$ 215mn in US revenues for FY20E (a growth of 22% YoY). However, the management’s guidance stands at US$ 240mn in US revenues for FY20E. The significant ramp up in the US to drive ~170bps EBITDA margin expansion over FY20-21. Additionally, the reduction in debt post Aus biz sell off will lead to annual savings of Rs 1.7bn in interest cost and amortization, and enable 5x YoY eps growth over FY21E. The US revival and earnings growth, along with an expected improvement in balance sheet, enable us to maintain our positive stance.
Operating leverage kicks in; earnings growth set to revive. Valuation and view: We raise our earnings estimate by 9%/7% to factor in better traction in the US and other regulated market, and an improvement in profitability of the emerging market business. Accordingly, we revise our SOTP-based TP to INR635 (prior: INR590). We remain positive on STR on the back of its healthy ANDA pipeline and superior execution in regulated markets, driving a strong turnaround in earnings over the next 2-3 years. Reiterate Buy.