Buy Strides Shasun; target of Rs 530: JM Financial

JM Financial's research report on Strides Shasun

4QFY18 was a washout quarter for Strides with Revenues/EBITDA/PBT (before exceptional) declining 11%/34%/69 QoQ to INR 6,642mn/865mn/185mn, 15%/36%/73% below our estimates, mainly driven by (i) 50% QoQ decline in US sales to USD 21mn due to negligible primary sales of key products (gLovaza and Potassium Citrate) as a consequence of loss of market share following aggressive pricing competition from incumbents, and, (ii) sustained weakness in institutional business. The consequent negative operating leverage resulted in EBITDA margin declining 446bps QoQ (-611bps YoY) to 13.0% (JMFe 17.2%). The challenges faced in FY18 has resulted in some key strategic changes: (i) the return of Arun Kumar in the executive role, (ii) gradual exit from the partnership model in the US with focus on ramping up own front-end for better control, (iii) increased focus on other regulated markets to diversify revenue base, and, (iv) stay on further investments in the Consumer Healthcare business (INR 446mn in FY18). With most restructuring/M&A activities now completed (barring the impending Arrow-Apotex merger), we believe that the management now has increased bandwidth to focus on executing their strategic objectives to turnaround and grow the business. We expect earnings to remain soft for a couple of quarters and pick up in in the latter half of the year driven by the improvement in the operating environment in the African branded and institutional businesses coupled with steady growth in the regulated markets. We cut our FY19/20 estimates to account for weak FY18 results and to factor in the impact of the corporate activities (mainly Solara demerger and sale of India brands business to Eris Lifesciences) carried out over the past couple of quarters.

Outlook

We value the company at a blended EV/EBITDA of 11x FY20E EBITDA and arrive at a TP of INR 530. Maintain BUY.