Strides Arcolab- Therapeutic Benefits

One company that is likely to reap the benefits of the huge opportunity that the US generics market offers is Strides Arcolab. Investors would do well to have this stock in their portfolio with a one year perspective, says Shrikant Akolkar.

Key Points

• SAL has many products in therapeutic segments such as oncology, some launched and some in the pipeline. The company will benefit from the fact that the demand for oncology products is high due to shortages in USA.
• Its CY11 financial performance has been very robust, with the overall topline growing by 46 per cent to Rs 2577 crore and the bottomline growing by 83 per cent to Rs 225 crore.

The growth of the generics market in USA has provided a significant impetus to the pharma sector. One company that is likely to benefit immensely from this is the Bengaluru-based pharma company, Strides Arcolab (SAL).

SAL focusses more on high-margin therapeutic segments, such as oncology. The company has launched many products in this category, and has 31 non-monetised products waiting to be launched. Due to the shortages in USA, the demand for oncology products is high, which means that SAL will see an expansion in its revenue and margins.

The company recently sold its Australian subsidiary, Ascent Pharma, for USD 390 million, i.e. about Rs 2000 crore, in an all-cash transaction. It repaid its debt of almost Rs 300 crore from the money it received from this sale. It also expects to repay USD 120 million (Rs 624 crore) towards FCCBs due in June 2012. Its current longterm debt stands at Rs 1611 crore. It is not clear why the company is not using all this cash to repay its debt, which will improve its profit margins and increase the shareholder value.

SAL has two business segments, viz. pharmaceuticals and sterile products (the latter also called Agila). The pharmaceuticals business brings in 60 per cent of its revenues, while Agila brings in 40 per cent. Revenue from the pharma business has gone up at a CAGR of 28 per cent over the last three years, and that of Agila has grown by 65 per cent. The company has a higher EBITDA margin in Agila at 26 per cent, as compared to that of 16 per cent in pharma. Due to a higher growth rate and better margins, Agila contributes over half of its total EBITDA. With increased focus on speciality drugs, we expect the revenues from Agila to keep up the growth momentum.

On the financial front, its CY11 performance has been very robust (the company follows the calendar year as its financial year). Its overall topline grew by 46 per cent to Rs 2577 crore, while the bottomline improved by 83 per cent to Rs 225 crore. The EBITDA margins declined from 22 per cent to 20 per cent, mainly due to the adverse currency fluctuations in Brazil. In the March 2012, quarter its adjusted topline grew by 40 per cent. The company’s net profit zoomed to Rs 642 crore from Rs 40 crore during the year ago period, as it booked a profit of  Rs 631 crore in the Ascent Pharma transaction. The normalised EBITDA margins are at 26 per cent. The net profit of USD 12 million (about Rs 61 crore) is 50 per cent up from the year ago period. This is the normalised profit of the company excluding extraordinary gains. Its current debt-to-equity ratio of 0.6x has come down from a level of 1.6x, as the company used its cash to reduce the debt.

On the valuations front, SAL is trading at a PE of 17x to its TTM EPS of Rs 42. This looks a little costly as compared to its peer Biocon, which is trading at a PE of 16x. Its comfortable cash position brings its EV/EBITDA down to 9x, which is in line with that of Biocon. SAL has a potential FTF (First to File) status on 14 drugs, which reflects its superior growth prospects. One area of concern for us is the shares pledged by its promoters.

However, for now, the non-monetised products are a good growth opportunity for SAL. The company wishes to foray into new domains like biosimilars, ophthalmics and peptides going forward, which have the scope to take the business to the next level. We also believe that as the company has sold its business at a good profit, it may declare a dividend to reward its shareholders. One could look at entering the counter at its current levels, and expect a 25 per cent over the next one year.