Strides Shasun Research Reports By Motilal Oswal, HDFC Sec, Axis Direct

Research report No. 1 by HDFC Securities

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.

Research report No. 2 by HDFC Securities

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).

Research report by Motilal Oswal

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

Research report by Axis Direct

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