Buy Strides Shasun; target of Rs 481: Motilal Oswal

Motilal Oswal's research report on Strides Shasun

STR’s revenue was stable YoY at INR6.6b (our estimate of INR6.3b). Growth was led by Australia (+18% YoY to INR2.3b) and the US (+13% YoY to INR1.7b) businesses, offset by de-growth in Institutional (-29% YoY) and Africa (-35% YoY) businesses. Gross margin expanded 200bp YoY to 48.7% on account of a better product mix and a favorable currency impact. Other operating expense rose 60bp YoY, restricting EBITDA margin expansion to 140bp YoY (to 12.2%). Though EBITDA was up 13% YoY, STR reported a loss of INR43m (our estimate of a profit of INR157m), largely due to lower other income, higher depreciation and a loss in JV/associates.

Outlook

We cut FY19/20E EPS by 24/16% to factor in de-growth in Institutional business and lower other income. With earnings almost at trough, we note that STR is on path of course correction in the US generic business, aligning primary and secondary sales in Africa, and improve margins of Institutional business. Thus, we would turn more positive on STR once there is clear evidence of a better performance, which is likely to materialize from 2HFY19, in our view. We maintain Buy with a price target of INR481.