Strides Pharma Science - Stelis turnaround to provide valuation upside - ICICI Securities

Strides Pharma Science (Strides) holds 48.7% equity stake in Stelis Pharma on fully diluted basis and would invest additional US$25mn to make it a subsidiary in next 9-12 months. Currently Stelis is loss making entity and negatively affects Strides' profitability. In FY20, the losses from JV & Associates stood at Rs1.1bn, of which Stelis accounted for ~70% of these losses while remaining pertained to consumer health business (CHC). Management expects Stelis to witness operational turnaround in FY22E which may provide 15-20% upside to Strides' earnings. We believe US market (ex-Ranitidine) would grow 10.0% CAGR over FY20-FY23E while company's consolidated EBITDA margin would sustain at 20- 21%. Minimal capex requirement and healthy operational performance would help in generating FCFF of ~Rs12bn over FY21E-FY23E. Retain BUY.

- Stelis turnaround expected in FY22E: Stelis is primarily into BioPharma (biosimilars) and BioSource (CDMO of biosimilars). Within biosimilars, the company is working on several products in the categories of osteoporosis and insulins. In CDMO, it has developed fully integrated, multi-capable facilities for providing end-to-end biopharmaceutical development and manufacturing. Commercial supplies are expected to begin from Apr'21. Stelis is also commissioning a state of the art plant for vaccines which would be ready by Dec'20 with annual capacity of 60mn vaccines and 25mn lyophilized vaccines. The company is in discussions with global companies who are developing COVID-19 vaccines for contract manufacturing. The management expects Stelis to operationally break-even in FY22E.

- Base business progressing well: Strides performance recovered well in Q1FY21 and we expect gradual pick-up in US sales and EBITDA margin to continue. We estimate US sales quarterly run-rate to improve from US$50mn in Q1FY21 to US$65mn by Q4FY21 led by new launches and market share gain in existing products. EU business is growing strong and management remains confident of maintain this growth momentum. We estimate EU sales to grow at 13.7% CAGR over FY20-FY23E.

- Outlook: We expect a 12.7% revenue and 58.5% EPS CAGR over FY20-FY23E with margin improvement of 190bps driven by operating leverage and improving revenue mix. We have introduced FY23 estimates and expect revenue/EPS growth of 8.8/17.8%. We expect return ratios to remain muted with continuous investments in Stelis Biopharma which that would turn profitable over medium term.

- Valuations and risks: We raise EPS estimates by 12.6% for FY22 as we remove losses of Stelis from our estimates assuming that it will become subsidiary in near future and will operationally break-even in FY22. Hence, we don't ascribe a separate value for its stake in Stelis. Maintain BUY rating with a revised target of Rs710 based on 17xFY22E EPS (earlier: Rs631/share). Key downside risks: Regulatory hurdles and pricing pressures in the US.

Shares of Strides Pharma Science Ltd was last trading in BSE at Rs.596 as compared to the previous close of Rs. 606.55. The total number of shares traded during the day was 122945 in over 2405 trades.

The stock hit an intraday high of Rs. 610 and intraday low of 592.65. The net turnover during the day was Rs. 73976984.

Source : Equity Bulls

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