Operational Efficiencies And ESG Improvements Will Benefit Future Earnings

Key Takeaways

• Operational efficiency and strategic product introductions in the U.S. bolster revenue growth and competitive positioning for Strides Pharma Science.
  
• Demerger and cash flow improvements target better margins and a debt-free balance sheet, enhancing shareholder value and investor appeal.
  
• The demerger of the soft gelatin business and reliance on future U.S. growth and approvals pose risks to Strides' margins and revenue stability.

Catalysts

Develops, manufactures, and sells pharmaceutical products in Africa, Australia, North America, Europe, Asia, India, and internationally.

• Strides Pharma Science has significantly optimized its operational efficiency, reducing costs and improving net margins, evidenced by a 17.3% year-on-year revenue growth and a 43% increase in EBITDA growth. This operational leverage is expected to positively impact future earnings.
  
• The company’s U.S. business is on track to achieve a $275 million to $290 million revenue target for FY ’25, with plans to introduce up to 60 new and revived products. This strategy positions Strides for sustained revenue growth in the competitive U.S. market.
  
• The demerger of Strides' high-margin soft gelatin business created a unique specialty CDMO platform, which, coupled with operational efficiencies in the retained business, is expected to improve the company's net profit margins and deliver better shareholder value.
  
• Strides aims for a debt-free balance sheet within the next three years, driven by operational cash flow improvements and a targeted CapEx of ₹150-200 crores annually. This capital management strategy is poised to enhance the company’s return on equity and reduce interest expenses, thereby increasing net earnings.
  
• The enhancement of Strides' ESG performance has already yielded a favorable S&P Global Corporate Sustainability Assessment score, positioning the company as a more attractive investment, potentially influencing future earnings through improved investor perception and compliance efficiencies.

Strides Pharma Science Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Strides Pharma Science's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 11.9% in 3 years time.
• Analysts expect earnings to reach ₹7.4 billion (and earnings per share of ₹80.0) by about April 2028, up from ₹3.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.5x on those 2028 earnings, up from 15.7x today. This future PE is lower than the current PE for the IN Pharmaceuticals industry at 27.9x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

Strides Pharma Science Future Earnings Per Share Growth

Risks

• The demerger of the high-margin soft gelatin business could potentially impact Strides' ability to maintain its past profit margins, thus affecting its net margins and overall earnings.
  
• There is a dependency on achieving growth targets in the U.S. market, such as reaching US $400 million by FY '28, which involves significant execution and regulatory risks, potentially impacting future revenues.
  
• Strides plans to make up for lost EBITDA from the demerged soft gelatin business through nasal spray and control substance products, which rely on future approvals and market conditions, posing risks to EBITDA stability.
  
• Soft launch delays in other regulated markets due to external partner dependencies might hinder revenue growth and affect overall earnings in the near term.
  
• Despite the favorable outlook, the political environment and potential regulatory changes in the U.S. may introduce uncertainties and risks to revenue and earnings projections.

Valuation

• The analysts have a consensus price target of ₹1373.0 for Strides Pharma Science based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1874.0, and the most bearish reporting a price target of just ₹1070.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹62.0 billion, earnings will come to ₹7.4 billion, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹584.4, the analyst price target of ₹1373.0 is 57.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.