Business Analysis 11: Strides Pharma Science Ltd
Strides Pharma has a rich history of creating value through its experienced promoters. They are doing the similar thing again to unlock value further through listing Onesource.
As you hear everywhere that pharma is a safe place fo bet now, I'll deep dive into one such company in the pharma sector. Let's see if it's worth studying or investing.
As promised, today's content is about Strides Pharma.
Strides Pharma has a rich history of creating value through its experienced promoters. They are doing the similar thing again to unlock value further through listing Onesource. We'll see later if it's worth investing at a fair price.
The company, Strides Pharma is a global player, majority of their revenue comes from the US. Their products include dry powder, suspension, liquid, nasal spray, hormones, topicals and gel, soft gelatin capsules, tablets etc. There are 7 manufacturing plants established across 4 continents.
They target to deliver 12-15% topline growth with an EBITDA of 950-1000 cr at 20-22% margin in FY25. Revenue comes from 3 segments.
UD market - 52.4% + Other regulated markets - 29% + Growth markets - 11.6% + Access markets - 7.06% as of Q2 FY25.
More than half of the revenue come from the US market. FY25 revenue from the US market will be in the range of $285-300 mn in FY25. This will touch $400 mn by FY28 as per their guidance.
Also they target to achieve net debt to EBITDA in less than 2 by the end of this fiscal. Total commercialized products for the US market increased from 67 in Q1 FY25 to 71 in Q2 FY25.
Growth and Access markets are low margin businesses. That's why there's some pressure in the consolidated margin. Their revenues are also lumpy. However, both will come back at a satisfactory level.
Now the company has net debt of 1902 cr as of Q2 FY25. Their constant effort for debt reduction is on with further reduction of 500 cr including debt pushdown of 280 cr to Onesource by FY25. Capex of 150-200 cr will be from internal accruals.
Let's come to its high growth business, Onesource. It is India's first specialty pharma pure play global CDMO player. They announced the creation of the business in 2023. It was created through 3 segments.
Biologics and high-end drug device combination, a realm under Onesource (formerly known as Stelis Pharma)
Oral technologies which is soft gelatin capsules, demerged from Strides Pharma
Sterile injectibles which was demerged from Steriscience
The company got $95 mn funding for Onesource for capex and debt reduction. Of which, $45 mn will be used for debt reduction for Onesource from $145 mn to $100 mn and target to achieve net cash position ny FY27. The rest $50 mn will be used for capex to increase installed capacities of cartridge and pen assembly line from 40 mn units to over 150 mn units in the next 15 months to meet increased order book for GLP-1s.
Onesource got funding at a pre-money valuation of $1.65 bn in 2024 at ₹633/share, 82% higher premium from its initial ₹364/share at 1:2 swap ratio.
Let's do the valuation. They target to deliver 12-15% topline growth on consolidated basis with an EBITDA margin of 20-22% in FY25. So the calculation comes like this.
On conservative assumption, Consolidated revenue 4600 cr and 1000 cr EBITDA in FY25.
Although the Growth and Access markets have lumpy revenues, the US market will continuously grow at an early double digit for the next 3 years.
Current market cap - 5964 cr. Revenue multiples - 1.2x and EV/EBITDA - 8x. Looks like a good deal.
Even if I compare assuming FY25 guidance with its peers, the parent company, I mean Strides Pharma is trading at an appropriate valuation. We may see further upside for this counter.
On the other hand, the valuation of Onesource is quite expensive right now if it lists at a $1.65 bn market cap because they will do about $160-180 mn of topline with an EBITDA of $55-61 mn. So revenue multiples - 10x and EV/EBITDA - 30x on TTM basis.
Let's discount the future now. At $350-400 mn topline and EBITDA $140-160 mn after 3-4 years, revenue multiples - 4-5x and EV/EBITDA - 10-11x. Now looks moderate at least. But remember you are discounting 3-4 years and the business is still PAT loss.
Also, there's high excitement in the CDMO industry and we make mistakes in the extreme optimism by giving high valuation. And marquee investors' onboarding is just to raise the pulse of the retail investors.
So, my take is it would be better to wait for the business to list on exchanges first and then wait for any big correction to add it to your portfolio because the industry has several tailwinds for the next 5-10 years, the company is doing fantastically well, and US Biosecure Act could open more opportunities for India as well as the company in the future.
It would be wise to track both businesses just one more quarter to get a sense of their evolution.
Thanks for reading
Take care
Rabi
Disclaimer: I'm not SEBI registered. This content is for educational purposes only. Do your own diligence.