Strides Arcolab has reported inline results. US business improved q-o-q which was the key positive, though Australia was weaker due to supply constraints. Management expects margin recovery from H2 led by better mix and operating leverage. Given its leadership in Australia, steady ramp-up in developed markets and recovery in US we expect 36% Ebitda CAGR over FY19-20. Strides Arcolab trading at 14x FY18E EV/Ebitda, does not factor any recovery, and risk-reward is favourable. Retain buy.
The revenues were 1% and margins 60 bps below expectations. Lower other income and exceptional loss of Rs 49 million led to reported loss of Rs 41 million. The key positive in the quarter was the improvement in US sales (+30% q-o-q). Management indicated that it expects a sharper ramp-up in H2. Australia business also grew 18% y-o-y though q-o-q was impacted due to supply constraints. EM business was weak as guided earlier. Institutional revenues were better than expected but margins declined sharply due to increased API pricing.
Management indicated that it has completed all commitments and going forward it is accepting orders only at higher pricing, which should aid margins. On Africa, management indicated that it is currently not booking any sales on the branded side as it is working to correct inventory. Sales in these will start from H2. US revenues including partners is at $35 million run-rate and it should be able to maintain this. Ibuprofen will be launched in Q4 as it is awaiting API change approval.
Other expenses should be around this level. It expects another eight approvals in the US in the current year. We adjust our estimate for the quarter and change our dollar-rupee to Rs 68 (vs Rs 66). Our FY19-20 Ebitda changes by -4/+2%. We expect Strides to see sharp margin improvement in H2 led by 1) Ramp-up in US; 2) Better institutional margins; 3) Africa sales; and 4) Operating leverage. Strides now trades at 10x FY20E PE, a 50% discount to sector. Trading at 14x FY18E EV/Ebitda, it values the ex-Australia business at 1x EV/sales implying no recovery. We expect Ebitda 36% CAGR over FY18-20. Retain buy with target price of Rs 600.