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SP Tulsian

Investment Advisor

12.00 AM Jul 12th 2013

Strides Arcolab

BSE ID : 532531     NSE ID : STAR

RECOMMENDED PRICE 750.00

PEAK FROM RECO 1050.00 40.00%

CURRENT PRICE 674.20 10.11%

Strides Arcolab is a first generation pharmaceutical company with interest in specialty pharmaceuticals, pharma generics and branded generics. Share price has corrected sharply in the past one week and now at 750 is recommended for a buy with six month target price of Rs 900.

Strides Arcolab

Incorporated in 1990, Strides Arcolab is a first generation pharmaceutical company with interest in specialty pharmaceuticals, pharma generics and branded generics. The company's key focus is development and manufacture of IP-led niche pharmaceutical products, particularly sterile injectables. It is among the world's largest soft gelatin capsule manufacturers.

Headquartered in Bangalore, the company has manufacturing facilities in 14 locations globally, a 350-scientist strong R&D hub in Bangalore and marketing network in more than 75 developed and emerging markets. Additionally, it has also partnered with several of the world's leading pharmaceutical companies.
 
As of 31st March 2013, promoters held 27.39%, while 117 FIIs held 45.51% (up from 37.33% on 31st December 2012). Domestic funds hold 10.34%, leaving public float of 16.76% among 30,000 retail investors. The company counts Goldman Sachs, Morgan Stanley, Deutsche Securities, HSBC Global, Reliance Capital and Reliance Life among others, as major shareholders.
 
Company, following calendar year for financial reporting, has reported consolidated revenues of Rs. 2,307 crore for CY12. Its profit before tax (PBT) stood at Rs. 950 crore, thanks to the Rs. 658 crore exceptional profit on sale of its 94% stake in Australia's Ascent Pharma to Watson Pharma. 
 
Reported CY12 PAT stood at Rs. 947 crore, while adjusting for the exceptional gains, leads to adjusted PAT for the year of about Rs. 290 crore. CY12 EPS is Rs. 144.
 
As at 31st December 2012, company's equity was Rs. 58.8 crore and net worth Rs. 2,026 crore, translating to BVPS of Rs. 345, on a consolidated basis. It has net debt of about Rs. 1,150 crore.
 
On 27th February 2013, company entered into sale agreement for its wholly owned specialties business housed under Agila Specialties Pvt. Ltd. to Mylan Inc for US$1.60 billion in cash, in addition to US $250 million, upon meeting certain conditions, taking the total deal size to US $ 1.85 billion.
Agila, accounting for 60% of CY12 revenues and 77% of annual EBITDA, is focused on domains such as oncolytics, penems, pencillins, cephalosporins, ophthalmics, peptides and biosimilars.
 
The deal is pending completion as Foreign Investment promotion Board (FIPB) has deferred its opinion on the deal, on concern of ownership of few remaining critical cancer-making facilities falling in hands of MNCs. However, it has been cleared by Competition Commission of India, as domestic sales account for less than 5% of its consolidated sales.  
 
For the first quarter of CY13, company has published only standalone financials comprising the pharma and biotech business, as Agila's specialities business is to be divested (subject to approvals). For Q1CY13, the pharma business reported revenue of Rs. 193 crore, up 45% YoY from Rs. 133 crore YoY.
 
EBITDA for Q1CY13 stood at Rs. 49 crore versus Rs. 18 crore YoY with margin strengthening to 27%, While in Q1CY12 company reported net loss of Rs 28 crore, this year it has clocked net profit of Rs. 32 crore. This sharp turnaround shows the potential in the pharma business, on which the management bandwidth will be deployed post divestment of the specialities business.
 
Some recent developments with respect to the company:

1. In June 2013, it announced WHO pre-qualification for anti-malaria product, making it the only player to provide complete treatment portfolio in major diseases of HIV, TB and malaria.

2. Board approves hiking investment limit by FIIs in company's equity from 49% to 74%, now seeking shareholder and RBI nod.

3. Agila received US FDA approval for Zoledronic acid injection, US market for which is over Rs. 3,000 crore.
 
Company's current market cap stands at only Rs. 4,430 crore. If the Agila divestment sails through, the company will receive cash nearly double its market cap. Moreover that inflow will be used to retire debt and grow the pharma business. 
 
EPS for Q1FY13 stood at Rs. 5.36 on equity of Rs. 59.05 crore. Management has guided revenue of Rs.1,000 crore (sans Agila) for CY13 and EBITDA of Rs. 200. This translates into EPS of close to Rs. 25.
 
Share price has corrected sharply in the past one week and now at 750 is recommended for a buy with six month target price of Rs. 900.

Disclosure: No holding in the stock

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