Strides Shasun has had a tough year. The stock has corrected over 35% year to date, worrying shareholders and investors. While there is no clear cut reason for the underperformance, the following is a summation of some key concerns brought up investors and analysts about the company:

1)

Exiting branded generics in India

In November 2017 Strides Shaun announced its decision to sell its branded generic business in India to Eris Life for Rs 500 crore. The reason for the decision was to focus on international markets and reduce debt.

The business had sales of around Rs 180 crore and had 750 medical representatives. The company had a portfolio of more than 130 brands such as Vitamin B drug Renerve, iron deficiency drug Raricap and central nervous system drug Solus.

While paring debt is a positive outcome from the deal, analysts are worried it let go of a lucrative market for the company. While India brands' performance had been impacted by GST and demonitisation, it is letting go of a higher margin business that is also considered a good hedge against changing pricing trends in the US.

With this sale to Eris Life, Strides does not have a presence in India formulations anymore.

2) Concerns over the Institutional Business

The institutional business as of FY17 was around 16% of company’s sales. In this segment the company manufactures anti-viral, Hep C and malaria drugs for global procurement agencies and institutionally funded aid projects, such as, the United States President’s Emergency Plan for Aids (PEPFAR).

There is some concern about this business after Ajanta Pharma’s commentary. Post the fourth quarter, Ajanta said the Africa tender business erosion has been higher than anticipated.

This is due to sharp price erosion and shrinking sizes of tender. IPCA has re-entered the market as well which has resulted in Ajanta’s market share falling by 1-2%.

Hence the fear is the overall erosion in the tender business is higher than anticipated and is a negative read through for Strides.

3) Earnings pressured

The company has disappointed in the past few quarters. For example, margins in the three quarters of FY18 has been a key concern.

In Q1FY18 Margins were 10.4% compared to 17% the previous year. In Q2FY18 it recovered to 13.2%, but was lower versus 17.7% the same quarter previous year and in Q3FY18 it was 16.4% compared to 19.4% YoY.

While Q4 numbers are yet to be released, the street is hopeful of a recovery but headwinds such as US pricing pressure and institutional business declining continue.

Talking about earnings, analysts and investors have brought up lack of details as a concern as well.

The company does not provide a break up of its regulated markets – US, Australia with little information on details such as US pipeline. So while the US is expected to touch $40-45 by end FY18 in terms of a quarterly run-rate the street has little information beyond commentary to compare or extrapolate it.

4) Too Much Restructuring?

Strides has been known to undertake multiple restructuring and M&A transactions. A few of the steps including exiting the low margin generic manufacturing business in Africa, selling off its India presence, demerging its API business into Salora Active Pharma.

While all this restructuring is likely to be positive for the long term structure, the street is concerned that too many mergers and acquisitions could make the company run the risk of losing core focus of the company.

The most recent is the company announcing the merger of its Australia business, Arrow, with Apotex.

While the Arrow-Apotex transaction will propel Strides to the top position in Australia, the street is still awaiting details on valuations to make its final decision on how lucrative the deal is.

5) Promoter's other business interests

Lastly, there are some concerns brought up on the promoter focus on the company. Arun Kumar is known to have investments across businesses.

Investors are concerned that Kumar's focus might be diluted due to these other business interests. Kumar has been they key driver of the company’s strategy.

While it may not impact day to day functioning the fear remains that the lack of focus could impact fresh investments into the stock. However, it is important to note Arun Kumar has been reappointed as the Executive Chairman in FY19, from Non-Executive Chairman, and hence is expected to play a more active role.

While many of these concerns have been well known it could be a culmination of these factors that could be weighing the stock.

At this stage it is also important to point out the bullish case for Strides. Analysts are looking at the US business to touch $200 million worth of annualised sales by FY20.

It also has a fairly steady track record when it comes to regulatory inspections from the likes of the USFDA. The copmany has also grown to a solid presence in Australia.

Many consider the Arrow-Apotex deal to be directionally positive providing access to 60% of pharmacies in Australia on priority basis. Valuation wise, the stock is currently trading down 10 to 11 times the price to earnings ratio on an FY20 estimate.

Lastly, shareholders take confidence from the company's past instance of rewarding shareholders. It paid a total dividend of Rs 605 per share, amounting to $655 million after the $1.7 billion sale of its injectable arm Agila to Mylan in 2013.

First Published:May 16, 2018 2:50 PM IST