I love finding great managements at the bottom of a bad business cycle, and on the cusp of a turnaround. These situations offer excellent risk adjusted rewards. A short thread on one such great management - Arun Kumar and Strides Pharma.
1.Arun Kumar is an Indian pharma legend. He uses Strides as an incubator and has spun off many business worth billions of $. Strides has one of the highest ANDA filings in the world. They are a major generics player in US, Europe and Africa, and moving towards complex molecules
2.A confluence of business strategy changes, macro factors and bad luck threw Strides off last year. The US business saw massive price erosion. One of their biggest molecules Ranitidine was banned in the US. The war disrupted supply chains. The stock has crashed to 10yr lows
3.After years of investments, their world class Biopharma CDMO subsidiary Stelis finally started commercial operations with the Russian covid vaccine. Then the war happened + vaccine demand reduced, and they are stuck with inventory, further hampering cash flows.
4.Arun Kumar returned as full time CEO, focusing on network optimization and cost reduction. Q2FY23 was the best ever quarter for the US business at $60m revenues. They are to receive around 600cr Arrotex (an earlier sale) this month. No more investments in Stelis from Strides.
5.Strides guides net debt to be at 1000cr by FY23 (over 3000cr now). Reducing price erosion and operational efficiencies .ean high odds of the guidance playing out. Last week a US court dismissed the evidence that ranitidine causes cancer. Strides may be able to relaunch too.
6.Possible upside?
At 3200cr mcap, it is available at 0.9 times sales (10 yr average is about 2.5). Barring any more bad luck, they should get to 500+cr operational cash flow in FY24. At 15-20 times long term average multiple, could trade at 7.5-10kcr mcap. Plus Stelis free.
At 3200cr mcap, it is available at 0.9 times sales (10 yr average is about 2.5). Barring any more bad luck, they should get to 500+cr operational cash flow in FY24. At 15-20 times long term average multiple, could trade at 7.5-10kcr mcap. Plus Stelis free.
7.Summary of thesis:
- Management ability top notch
- Coming out of a rare situation where everything went wrong
- Strengthening core business and huge optionality with Stelis
- Debt reduction and improving cash flows to hit books soon
- Throw away starting valuations
- Management ability top notch
- Coming out of a rare situation where everything went wrong
- Strengthening core business and huge optionality with Stelis
- Debt reduction and improving cash flows to hit books soon
- Throw away starting valuations
Risks:
- Continued price erosion
- Debt reduction not playing out
- No liquidation of Russian vaccine
I track developments closely and believe there can be swift and sharp returns. But with high debt, this is VERY risky.
This is not investment advise. I may sell anytime.
- Continued price erosion
- Debt reduction not playing out
- No liquidation of Russian vaccine
I track developments closely and believe there can be swift and sharp returns. But with high debt, this is VERY risky.
This is not investment advise. I may sell anytime.
Some you guys track / have tracked Strides in the past. The valuations and cycle are different now from when you may have invested, of course. Do share your thoughts.
@itsTarH @Chins1729 @sahil_vi
@itsTarH @Chins1729 @sahil_vi
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