Strides Shasun gives phenomenal ~30% CAGR over 10 years and is awarded title of “specialist in wealth creation” by HDFC Sec
Amey Chalke and Siddhant Mansukhani of HDFC Securities have heaped rich praise on Strides Shasun, a small-cap Pharma stock with a market capitalisation of Rs. 7100 crore.
The duo has described Strides Shasun as a “specialist in wealth creation”.
The logic for doing so is impeccable:
“Over the last decade, Strides Shasun (STR) has given its shareholders a phenomenal ~30% compounded annual return. Capital invested in Oct-07 would have grown ~10x today. While STR’s aggressive M&A activity can be viewed negatively in-terms of capital allocation, its track record of value creation cannot be questioned. The company’s philosophy on this remains unchanged and its focus remains firmly on enhancing shareholder wealth.”
Eminent stock wizards Billionaire Satpal Khattar & Prof Shivanand Mankekar make beeline for Strides Shasun
Naturally, any stock which gives a 30% CAGR over ten years will attract the crème-de-la-crème of ace stock pickers.
As of 30th September 2017, Prof Shivanand Mankekar holds 18,55,321 shares (2.70%) in his own name and 11,59,178 shares (1.30%) in the name of Laxmi Shivanand Mankekar.
Satpal Khattar holds 15,60,032 shares (1.74%).
We are already familiar with the profiles and portfolios of Prof Shivanand Mankekar and Satpal Khattar and there is no need to reiterate it.
The Prof is known for his highly reclusive habits. He keeps his activities in Dalal Street a top secret.
Of course, I did manage to ferret out important information about his portfolio as well as his investment modus operandi (see Prof. Shivanand Mankekar, The Genius Stock Picker With A Concentrated Portfolio).
As regards Satpal Khattar, it is notable that his latest stock pick has been endorsed by Mudar Patherya as being “at cusp of big opportunities”.
Divestment will enable Strides to focus on profitable businesses (54% upside): Motilal Oswal
Motilal Oswal has recommended a buy of Strides Shasun with the confident assurance that the stock has a target price of Rs. 1214 which is a whopping 50% upside from the CMP of Rs. 800.
The logic is as follows:
“Divestment to focus on profitable businesses
We believe that sale of domestic formulation business at 2.7x EV/FY17 sales is not only at good multiple but would also enable Strides Shasun (STR) to focus on US and Australia’s regulated market and Africa business in emerging market. The deal also enables STR to reduce financial leverage, thereby improving profitability.
– Transaction details: Strides Shasun (STR) has entered into definitive agreement with Eris Lifesciences for sale of domestic branded formulation business for cash consideration of INR5b. In this transaction, STR would divest portfolio of 130+ brands along-with employees forming part of the domestic branded business. STR would retain global rights of these products. The transaction is subject to customary closing conditions and both companies intend to close the transaction by 30 November 2017.
– Deal to improve operating margin and reduce financial leverage: STR, over past two years had spent ~INR2.5b to acquire brands from J&J, Sun Pharma and Medispan. The sale of these brands was INR1.8b in FY17, implying EV/sales of 2.7x, which is decent as this business has been EBITDA neutral for STR. Thus, sale of this business would reduce revenue for STR and improve EBITDA margin. Repayment of debt of INR4b would reduce annual interest outgo to the tune of INR350m, thereby improving profitability as well.
– Change in estimates and view: We tweak our estimates to incorporate sales of business and use of proceeds to repay debt. Accordingly, we marginally raise our EPS estimate to INR47.4/INR74.8/INR92.1 for FY18E/FY19E/FY20E and raise our price target to INR1,214 (SOTP basis). We continue to like STR on the back of robust ANDA pipeline, consistent compliance, outperforming industry in Australia market and lower net debt to equity ratio. Reiterate Buy”
Opportune time to invest in Strides Shasun: HDFC Sec
HDFC Sec has also projected a target price of Rs. 1200 for Strides and opined that now is the opportune time to buy the stock. The rationale is as follows:
“Another good deal
In another business restructuring, Strides Shasun (STR) has sold its India-branded business to Eris Life Sciences, for a consideration of Rs 5bn. The business contributed only ~5% to the total topline in FY17, and would have required significant investment to scale it up further. This is the second such business rationalisation by STR in FY18, along with the hive-off of the commodity API business. We believe that these divestments would help narrow STR’s focus on the high potential business segments, i.e. the US and Australia, where investments are now complete, and strong growth is expected to kick-in over FY18-20E.
At ~16x/12x FY19E/FY20E EPS, STR is available at attractive valuations. With debt expected to drop by ~Rs 8bn in FY19E (32% of Sep-17 net debt) owing to these divestments, we find more comfort with our FY19/20E earnings estimates. On the back of the launches of gLovaza and potassium citrate in the US, and an expected string of approvals over the next 12 months (new GDUFA guidelines), mgt has guided for a ~US$ 50mn/qtr rev run-rate for the US business from 4QFY18 (v/s our est. of US$ ~38mn).
We believe that this is an opportune time to invest in STR, with strong sequential improvement likely from 2HFY18. Re-iterate BUY with a TP of Rs 1,200 (18x Sep19E + Rs 100/sh for Solara + Rs 30/sh for Biopharma).”
Margins will improve from H2’18: Axis Direct
Axis Direct is also gung-ho about Strides Shasun though their target price is lower at Rs. 940.
The investment rationale is as follows:
“Q2 margin miss; to improve from H2’18
Q2 revenue growth (18% YoY) was in line, but EBITDA declined 15% YoY (12% below our expectations) on lower gross margin of 51.4% (down 570 bps YoY) and higher other expenses. Gross margin declined due to lower contribution of higher margin anti-malaria tender sales, and higher sales of lower margin API. Higher depreciation coupled with lower interest income led to 65% YoY decline in PBT (~50% below our estimates). Company expects margins to pick up from H2FY18 via (1) increasing traction of its key products (gLovaza, Potassium Citarte) and monetization of its US pipeline (50% differentiated), (2) synergy benefits from acquisitions in Australia & (3) steady performance in India & Africa
We cut FY18/19E EPS by 38%/22% and revise SoTP to Rs 940 (16x Sep’19 EPS + Rs 31 for 40% stake in Stelis R&D + Rs 77 for 60% stake in API co.) vs. Rs 1,030 earlier. Maintain BUY”
We have to carefully mull over whether we can afford to not have in our portfolios a stock which is described as a “specialist in wealth creation” owing to its phenomenal track record of ~30% CAGR over 10 years and which has won the confidence of eminent visionaries like Prof Shivanand Mankekar and Satpal Khattar!