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Buy Strides Pharma Science, target Rs 472: ICICI Securities

Strides Pharma Science is a midcap company, operating in pharmaceuticals and health care sector.

Last Updated: Jul 05, 2019, 10.28 AM IST
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The brokerage has set a one-year horizon for the stock to hit the target price.
ICICI Securities has given a buy recommendation on Strides Pharma Science with a target price of Rs 472.

Shares of Strides Pharma Science traded at Rs 391.15 around 10 am on 5 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Investment rationale-
Warning letter on Puducherry plant
Puducherry is a formulations manufacturing facility. This facility was inspected in Feb’19 and was classified as OAI in May’19.

Existing supplies from the six commercialised products in the US from this facility would not be impacted. However, ten ANDAs are pending for approval from this site and these would be delayed impacting growth in the near term.

The company would be working with USFDA and consultants on the issues and would work to resolve the same at the earliest. "We believe it would take 12-18 months considering historical cases of other companies," said the brokerage.

Impact on financials
"We don’t see risk to existing sales from this facility despite the warning letter as existing supplies of six products would continue and five of these products can be manufactured at alternate sites as part of de-risking strategy," the brokerage said.

However, the brokerage expects delay in new approvals and incremental cost pertaining to remedial measures. So, it has cut revenue and PAT estimate by 1-2 per cent and 1-3 per cent, respectively, for FY20-FY21.

Regulatory approvals received for divestment of Australian business
The company has received all the requisite approvals to exit its Australia business (Arrow subsidiary).

The transaction is expected to close by 10th July, 2019. As per the transaction, Strides would receive an upfront payment of AU$300 million and a deferred payment of AU$94 million.

As per the brokerage, this deal will help in retiring debt of around $150-160 million and lower finance charge to improve profitability.

Valuations and risks
"We expect earnings to more than double over FY19-21 led by scale-up in US revenue and significant reduction in interest cost," said the brokerage.

Considering warning letter at Puducherry site and exit from Australia business (high margin and high value business), the brokerage has lowered target PE to 15 times from 17 times.

However, the brokerage believes recent correction in stock price has made valuations reasonable. "We upgrade the stock to 'buy' from 'add' with a revised target price of Rs 472 per share based on 15 times FY21E EPS (earlier Rs 544)," said the brokerage.

Regulatory hurdles and pricing pressure in the US are the key downside risks for the stock, the brokerage added.
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