Strides Pharma Science Limited (STAR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Strides Pharma Sciences Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand over the call to Mr. Abhishek. Thank you, and over to you, sir.

Thank you, Shapi. Very good evening, and thank you for joining us today for Strides earnings call for the first quarter of financial year 2026-'27. Today, we have with us Badree, Managing Director and Group CEO; and Vikesh Kumar, Group CFO, to share the highlights of the business and financials for the quarter. I hope you've gone through our results release and the quarterly investor presentation that have been uploaded on our website as well as the stock exchange website. The transcript of this call will be available in a week's time on the company's website. Please note that today's discussion may contain forward-looking statements and must be viewed in context of the risk inherent in our business. After the end of this call, in case you have any further questions, please feel free to reach out to the Investor Relations team. I now hand over the call to Mr. Badree for his opening comments.

Thank you, Abhishek. Good evening, everyone, and thank you for joining us for the Strides Q1 FY '27 Earnings Call. As always, I'll begin with an overview of our business and operational performance for the quarter, followed by key updates across our geographies and strategic initiatives. Vikesh will then take you through the financial performance in greater detail, after which we'll be happy to take your questions. Before I get into the quarterly performance, let me briefly comment on the operating environment. The geopolitical situation, particularly arising from the ongoing conflict continues to remain volatile. There has not been any meaningful change in the situation since our last earnings call, and the environment continues to remain fluid with new developments emerging almost every day. Across the industry, we continue to see supply chain disruptions, elevated freight costs, longer transit times and inflationary pressures across the multiple operating cost line items. We've been closely monitoring these developments and taking proactive actions to ensure continuity of our supply to our customers and patients. Despite these external headwinds, we have delivered a steady revenue growth, maintained healthy gross margins and improved PAT, which reflects the resilience of the diversified business model we have built over the last few years. The strong growth we are seeing in our Series business once again validates that our diversification strategy is working as intended. I'll briefly give the financial overview. With this, I'm pleased to report that we have started FY '27 on a steady note. For Q1 FY '27, we delivered 13% year-on-year growth in top line, supported by broad-based contributions across our business. Our ex U.S. markets continue to demonstrate strong momentum, delivering a 17% year-on-year growth. Over the last few years -- quarters, we have consistently spoken about the building a more diversified business model, and this quarter once again validates the strength of the strategy. From a profitability perspective, the quarter demonstrated the resilience of our operating model. Despite the additional operating and freight cost of INR 131 million arising from ongoing geopolitical situations, our EBITDA margins were maintained at 18.2%, broadly in line with the exit levels of Q4 FY '26. Our continued focus on portfolio quality, gross margin management and cost optimization helped mitigate a significant portion of these external pressures. Coming to the U.S. business, the revenue for the quarter stood at INR 6,282 million, that is $68 million, reflecting the stable performance despite increased competition in certain products launched over the last few quarters. As we have consistently maintained, the U.S. strategy continues to be centered around profitability and portfolio quality rather than pursuing the growth at any cost. During the quarter, we launched two products and increased our commercial portfolio to 72 products. We continue to hold top 3 positions in 37 products, which contribute approximately 70% of our revenues, underscoring the strength and stability of our portfolio. We continue to see strong demand in our specialty customer base, particularly in products where we have established differentiated positions. We have also made significant progress in the customer engagement over the last few quarters, helping us deepen strategic relationships and improve visibility for our future growth opportunities. Controlled substances continues to be an important growth lever for our U.S. business, and we remain confident in the long-term opportunity. We have always experienced delays -- we have experienced delays in a few product approvals, which we expect to materialize over the coming quarters. In parallel, we continue to focus on niche domains such as nasal sprays, transdermal patches, films and controlled substances. We now have multiple projects progressing across these technology platforms and continue to invest in building a differentiated pipeline that can support sustainable growth over the medium term. We expect additional filings and approvals and launches across these domains over the coming quarters. As we indicated during the Q4 call, we believe the growth trajectory in U.S. should improve over the course of the year with H2 expected to be much stronger, supported by new approvals, launches and portfolio optimization initiatives. I expect some of you may have concerns around the evolving developments in the U.S. pharmaceutical market, particularly around the proposed tariffs on generic pharmaceutical products starting August 2028. While the details continue to evolve, and these remains limited -- there remains limited visibility on the final implementation framework, and we are closely monitoring the developments. From a size perspective, as a strategy, we have worked on a U.S. manufacturing presence through our facility in Chestnut Ridge, U.S. We have invested significantly in building capabilities at this site with nearly 1/3 of our U.S. revenues being supplied from this facility today. More importantly, all the key growth platforms that we have been talking about, including the controlled substances, nasal space, transdermal patches and films are being developed around the Chestnut Ridge network. As these domains scale up over the next few years, the contribution from the U.S. facility to our U.S. sales will significantly increase, and we believe our business model is fairly balanced to support our long-term growth. We continue to remain committed to an aspiration of $375 million in North American business for FY '28. While there may be near-term volatility, the building blocks required to achieve this ambition are in place. Moving to ex U.S. business. The segment continues to be one of the most exciting and important drivers of our growth. Over the last few years, we have invested significantly in expanding our presence across the regulated markets, growth markets, customer relationships and product portfolio. We are now seeing the benefits of these investments reflected in our performance. Ex-U.S. revenue grew 17% year-on-year to INR 5,875 million with growth recorded across multiple geographies. We continue to strengthen our customer relationships across Europe, U.K., Nordics, Australia, leveraging our dependable supply chain and strong commercial execution. At the same time, Africa delivered another strong quarter, led by the continued expansion of our brands business. I'd also like to reiterate a point we made during our Q4 FY '26 call. Given the investments we have made across markets, partnership and portfolio expansion over the last few years, we expect -- we continue to expect the ex-U.S. business to grow faster than the company average over the foreseeable future. We believe that business will remain an important driver of both growth and earnings going forward. While ex-U.S. revenue for the quarter was at $63 million compared to $70 million in Q4 FY '26, the quarter was impacted by certain supply chain disruptions, which resulted in shipping delays across a few markets. This is more a timing issue rather than a demand issue and expect this spillover business to be recovered over the coming quarters. Importantly, the underlying demand environment across our P&L in ex-U.S. markets remains healthy, and our growth outlook for the business remains unchanged. In the U.K., we delivered a strong performance in the prescription business and continue to strengthen our relationships with key customers through consistent supply and execution. We remain encouraged by the progress we are making in this market. Across Europe, including Nordic region, our branded and OTC portfolios delivered a strong quarterly performance. The business continues to benefit from portfolio expansion, customer additions and improved market penetration, and we expect the momentum in these markets to continue going forward. Importantly, the margin profile of the ex-U.S. business continues to remain healthy, reinforcing our view that ex-U.S. is not only a growth engine but also an increasingly important earnings driver for the company. We continue to add customers across Europe, while expanding our portfolio and filing activity across multiple markets. Our strategy remains focused on building the high-quality and sustainable businesses in the markets characterized by strong customer partnerships and relatively stable competitive dynamics. Before I conclude, let me also briefly touch upon ESG. We continue to make meaningful progress on the sustainability front during the quarter. We improved our EcoVadis score to 68 out of 100, representing a 19-point improvement year-on-year. This reflects our ongoing commitment to the responsible growth, governance and sustainable business practices across our operations. As we look ahead, we believe the strategic foundations built over the last few years positions us well to navigate the current challenges. Our growth drivers remain firmly in place with sustained momentum in ex U.S. markets, continued growth of our Africa franchise and an improved outlook for the U.S. business in H2, supported by new approvals and launches. We remain committed to achieving our long-term revenue aspirations and our objective continues to be to maintain the gross margins between the 58% to 60% range and deliver superior EBITDA margins, driving operating leverage that translates into sustained EPS and P-A-T growth -- PAT growth over the medium term. With that, I'll hand over the call to Vikesh to take you through the financial performance.

Thank you, Badree. Good morning, good afternoon and good evening to all of you, and thank you for joining us. I'll now take you through the quarter's financial performance. As Badree outlined, Q1 FY '27 played out against continued geopolitical volatility, elevated freight costs and input cost increases. Even then, we grew across every key metric year-on-year, while the quarter was soft sequentially after a particularly strong close we had in Q4 FY '26. Our gross margins expanded by 60 basis points year-on-year to 60.9%. This was driven by a favorable business mix within the ex-U.S. market, and it helped us drive absolute gross margins grew by 14% to INR 770 crores. We expect gross margins to remain in the 58% to 60% range. On EBITDA, we reported INR 230 crores EBITDA for the quarter. It is up 5.4% year-on-year with an EBITDA margin of 18.2%. While this is down 130 basis points year-on-year, it is slightly ahead of 18.1% we reported in Q4 FY '26. This also reflects roughly INR 13.1 crores of incremental operating and freight costs that were attributable to geopolitical disruptions, which were absorbed during the quarter. Employee costs held steady at 19.2% of revenues and other operating costs, excluding freight, they increased INR 29 crores year-on-year, which was largely on account of higher manufacturing costs. Freight costs moved up to 6.2% of revenue from 5.3% a year ago, which was an 18.9% increase. While the macro headwinds continued during this quarter, we have been able to mitigate some of these challenges, which has led to a sequential improvement across these cost line items. Below EBITDA, our operational PAT was INR 123 crores, which was up 8% year-on-year with an EBITDA to operational PAT conversion being steady at 54%. Our operational EPS at INR 13.4 per share is also up 8% year-on-year. Reported PAT was at INR 166 crores, which is up 57% year-on-year with a reported EPS of INR 17 per share. This includes the gain we recorded from divesting our majority stake in Pivot Park, which was our captive global capability center. This transaction generated a gain of INR 74 crores and contributed INR 53 crores to reported PAT net of tax. On efficiency metrics, our cash-to-cash cycle stood at 123 days, an increase of 7 days year-on-year. This was driven by a 24-day increase in inventory levels as we prioritize supply chain resilience and continuity of supply in the current environment, alongside a 15-day increase in payable days. Together, it led to an increase in absolute working capital requirement for the quarter. After funding for this working capital investment, we generated an operating cash flow of INR 109 crores for the quarter, which was an EBITDA to cash conversion of 47%. We reduced net debt by INR 12 crores during the quarter, which brought our closing net debt to INR 1,425 crores and our net debt-to-EBITDA ratio improved to 1.52x from 1.55x at the end of March. It is in line with our commentary that our focus on net debt to EBITDA continues. Our net finance costs at INR 36.1 crores, well lower compared to INR 40.6 crores in Q1 of last year. I'm also pleased to share that CARE Ratings upgraded our long-term bank facilities rating to CARE A+ stable from CARE A positive during this quarter. And this reflects our -- the consistency of the financial results that we have delivered over the last many quarters. On returns, ROCE on a TTM basis moderated marginally to 15.3% from 15.8% in FY '26 as capital employed grew on recent investments and currency movements. We expect the return profile to improve as these investments mature. Despite a challenging cost environment, Q1 FY '27 reflects our resilience and continued discipline across cost initiatives, profitability and cash generation. Thank you, and we are happy to take any questions that you may have.

Shappi, we're open for Q&A.

[Operator Instructions] The first question is from the line of Pratik Kothari from Unique.

Sir, one comment on U.S. I mean, it has been a soft market for us for the last few quarters. Just anything -- any comment you even called out or you have been calling out increased competition there. Just in terms of efforts that we are making because our FY '28 target it just keeps us from where we are. So just what's going in the background?

Yes. So as far as we are concerned, we have clearly said, Pratik, that the first two quarters will be very soft. And having said that, the bulk of the launches is going to come from the second half onwards. And if you really see the entire construct, there are five levers which we are working on the U.S. business. One is in terms of the controlled substances should definitely deliver the growth for us going forward because considering that we have completed 1.5 years of the demonstration of our past history, I think that will be a clear lever of growth. Second thing is in terms of the new channels, which I spoke about in the speech, whatever I had. The third one is in terms of the new geographies, new partnerships should definitely add. The fourth one is in terms of the launches. That's something which we are working on. We have been relentlessly working on. Plus, we also are concentrating on OTC portfolio. So these five levers give us a confidence that while it is slightly muted at this point of time, the next 1.5 years, we should be able to significantly accelerate our efforts to get to an aspirational number of $375 million. And as we speak, we have made enough groundwork to get there. And we have to just -- we keep executing and keep relentlessly working towards that goal.

And this new approvals and launches that [indiscernible], this is from the existing basket that we have?

Yes, that is correct.

Speaker 4 Fair enough. And second, sir, we had a plan to go net debt free. I mean last year, we kind of accelerated a lot of investments. Now what would be our trajectory in terms of net debt free effect?

From an overall perspective, the current net debt is about INR 14.2 billion, like INR 1,420 crores. The really see it does not include the OneSource investments, which is currently valued at about INR 3.2 billion, INR 320 crores. Really see from our perspective, the way we are looking at it is like if we keep delivering and keep continuing to work on the growth in the next 1.5, 2 years, maybe in 2 to 3 years' time, we should be fairly neutral in terms of the debt. And also you have to understand, Pratik, like when we started the debt conversation, the dollar was INR 82. Most of our debts are at INR 82. Today, as we speak, it is at about INR 95, INR 97. It's not that company has not reduce debt. Company has reduced debt last year. Unfortunately, the thing is since the dollar -- the rupee depreciation was more, that was not seen. It's almost INR 3 billion of debt we reduced in the last year.

The next question is from the line of Anand Mudra from SOAR Wealth.

Sir, with respect to U.S. business, you mentioned in your opening remarks that you were not able to register some revenue because of higher freight costs. It's possible to quantify the amount, sir?

No, no. We said that the performance is because of the freight cost. There has been some supply elongated supply. We never said that we lost revenue because of the higher freight cost. It's not. As far as there was -- as far as the non-U.S. ex U.S. business is concerned, yes, supplies to some extent, affected us in terms of the revenue. But definitely, it's a very temporary matter. We will be able to catch up during the year.

Okay. Noted, sir. Also, sir, with respect to non-U.S. business, which is a key market for us? And how are we seeing the growth over there?

Yes. So as far as the ex U.S. market is concerned, you have to understand it in three parts, right? One is the B2C markets, which are specifically predominantly U.K., Nordics, South Africa, Africa. Those are the four markets. when I say Africa, it's francophone, Africa and Kenya. As far as the B2B markets are concerned, we have got Europe, we also have got Australia. And as far as the third category, if you really see is the business consisting of the LatAm, MENA, APAC, these are the regions we are working on. And the last category, we are in the process of regulatory filing. So the real new dollars, you'll start seeing it from '28, '29 onwards. And we are working very aggressively on the portfolio optimization as well as the go-to-market efforts on these markets. And if you really see the entire thing, it is very broad-based. The ex-U.S. market is quite broad-based from [indiscernible]. It has got B2C business, it has got B2B and B2B gives stability to B2C, and it's very widely spread. And the margins are also improving as we speak between these markets compared to the U.S. markets. And overall, we believe that the growth trajectory should continue. And our endeavor is to mirror the markets in the next 1.5, 2 years, and that's what we are trying to do. And you should be able to see that quite often from now on until the next few quarters.

[Operator Instructions] The next question is from the line of Gautami Aggarwal, an investor.

Hello, am I audible?

Yes.

Sir, my question is that to reach the $75 in the U.S. from -- by FY '28 from currently $284 million as FY '26 base, you effectively need to add around $90 million to $115 million in 8 quarters. So can you just walk us through the bridge how -- as to how to come from controlled substance -- how much will come from controlled substance dormant ANDA relaunches, OTC launches, et cetera?

Yes. So that's what I spoke about in my previous question also. There are five levers for that in terms of getting that additional $90 million. One, the first lever is in terms of the OTC business. We don't want to give any specifics with respect to the dollar revenue on each of these markets, but all may be similar, I'll put it that way. From a OTC business perspective, we are working aggressively on the OTC space. You should be able to see some -- a lot of green shoots immediately. The second thing is in terms of the controlled substances, the reason why we say that is because we have already completed the two years of controlled substances launches and the past history demonstration. So the growth should start from now on. The third one is in terms of the new products in the mines. We have got almost 100-plus products which are yet to be launched. And we are launching very systematically, keeping our profitability thresholds. We should be able to do that in starting from Q2 onwards. The fourth one is in terms of the new and specialty channels, which we operate. I think we have made enough inroads into those channels. That's something which is very important for us as we go forward. The last one is in terms of the expanding the partnerships in Canada and other geographies. We are already in discussions with the strategic partners for us, which will give us a stickiness from a long-term perspective. And all these 5 or 6 initiatives should give us the pathway to [indiscernible]

The next question is from the line of Kiran from Payree.

Sir, I have a couple of questions. The first question on the ex-U.S. market. Sir, we have grown from $59 million last year to $63 million. But if I look at the last four quarters, we went from $59 million, $61 million, $64 million, $70 million back to $63 million. So I was expecting the ex-U.S. market is not as cyclical as the U.S. market where we are H2 heavy, but we seem to have gone back to $63 million. So if you could just explain why this has happened? And I'm still expecting the Sandoz acquisition numbers are not in this. So just sub-questions, right? One is cyclicality of this and the Sandoz acquisition numbers. Are they there in the ex-U.S. or not?

Yes, sure. So as far as the -- one thing you have to know is if you really see the $63 million, whatever you have done, it's corresponding to the Q3 of last year, right? It's not that it's not grown, it's grown. So the -- if you really see it has got a combination of B2B and B2C markets, right? The few orders we could not fulfill because of the logistical and as well as a few issues with respect to the geopolitical situation. But hence, it has been built. And we said that whatever the $7 million from the Q4 will be made us through in the coming quarters. That's what we have said in this thing. And we are in the process of -- in that -- we are in the process of covering up that gap, and you will start seeing that in the subsequent quarter results. As far as the acquisition of the Sandoz is concerned, this is not -- these are all not part of the current numbers. We expect to close sometime in Q2 if we are lucky because we are waiting for permissions. And this will start adding up to the numbers in the H2, which month in the H2, we don't know at this point of time.

Got it, sir. Got it. Sir, second question, just very confusing. So Pivot Path had about INR 144 crores revenue. We sold this IT or GCC business, not IT really, but GCC business for INR 125 crore valuation. It is less than 1x sales. we retain 20% but I mean, I'm just trying to...

I think from your perspective, the way you have to understand this entire Pivot Path is like it is like a GCC, right? It's -- and you should not take the stand-alone of Pivot Path and try to arrive at an equation. What we are saying is that the -- from our perspective, so we got -- we sold the business for INR 100 crores and Pivot Path has got two businesses. One is the third-party business and the second one is the in-house -- the captive business. So don't look at it on an overall basis. It does not contribute significantly to the revenue of the Strides Group. All I can say is that these are all stand-alone revenues. And we believe that this business will do extremely well moment we start going into the third party business. And hopefully, it should add to our PAT in the next 4 to 5 years.

[Operator Instructions] The next question is from the line of Anupam Jain from [indiscernible] Investing.

What is the weighted cost of debt borrowing?

It's about 7.6%.

So there is no further improvement from here, you think?

I think we...

Has our rating upgrade?

We stabilized at a reasonable level, and we have got debt across geographies because the way we align our debt to each of our individual geographies. We've got an optimum and healthy mix, and we've continued to focus on interest costs. You would have seen a consistent reduction quarter-on-quarter for the last 7, 8 quarters.

Okay. Major mix will be from this INR 1,400 crores, major mix will be in U.S., 70%?

It is between India and U.S. These are our major geographies.

No major debt portion that will be in our U.S. subsidiaries.

Major debt is in India and then in U.S.

Okay. And one thing was in CARE rating, we are at INR 1,100 crores or something, and we are seeing here INR 1,400 crores. What is the disconnect?

Sorry, I didn't follow that. See, this is based on certain categories of the loans which are getting evaluated from a credit rating perspective. And so they have taken certain long-term loans and then they have done the rating. So it's not that the entire debt book is given a rating. That's the point...