Sunday, January 29, 2012

Stides Arcolab - Buy on declines

Strides Arcolab, a Bangalore-headquartered pharma company has sold its subsidiary Ascent Pharmahealth at an enterprise value of AU$ 375 million (about Rs 1,968 crore) to Watson Pharmaceuticals. The company is currently going through a restructuring phase. 

Strides had acquired a majority stake (50.1 per cent) in Australia-based Ascent Pharmahealth in August 2008. According to the news agency Reuters, this acquisition was valued at the price of AU$ 65 million (about Rs 260 crore). The company later had increased its shareholding up to 60.3 per cent. 

Ascent is one of the leading generics company in Australia. This company also has nine subsidiaries in countries like New Zealand, Singapore, Hong Kong, Malaysia and Brunei.  Ascent brought about 33 per cent of the revenues of Strides in CY2010. Ascent has grown by a healthy five-year compounded annual growth rate (CAGR) of 30 per cent in the topline. For the year 2010 the company reported sales of AU$ 132.3 million (about Rs 550 crore) while its net profit remained AU$ 12 million (about Rs 50 crore).

Its EBITDA margins remained at about 13 per cent, lower than the EBITDA margins of Strides (22 per cent) in the same year. For the year 2010 the company showed a growth rate of 26 per cent in topline and 30 per cent in the bottomline. This high growth has mainly arisen due to the high growth rates in the Australian pharma market. 

The Australian government has proposed a cut of 23 per cent in the pharma product prices from April 2012. Though the company is leading player in the Australian generics market, we believe that this would impact the margins of Ascent. 

Looking at the value that Strides has got for selling Ascent, we believe it will have a good impact on its balance-sheet. Its total debt as of June 2011 half-yearly result was Rs 2,419.51 crore. The company paid Rs 90 crore as half-yearly interest expense which works out to be Rs 180 crore of annual interest payment in 2011. Its interest cover ratio as per the same statement works out to be 2.15 which has decreased from 2.97 in the same period last year. Its debt to equity ratio stood at 0.74 in June 2011. In our opinion company will use the amount received from the Ascent deal to pay the debt and bring these ratios down. 

The company recently has also said that it will mainly focus on the injectable and specialties segment in which it has recently received many USFDA approvals. As we see it, the company is in a very good shape to take the benefit of these approvals in the coming years. Strides’ specialties division, Agila, is also doing well. In 2010 its revenues rose by 84 per cent and contributed about 39 per cent to the topline and 32 per cent in the EBITDA. 

Our Recommendation :
With the good price received for Ascent and many new products in the pipeline we believe that this stock will be an attractive bet going ahead. Investors could start looking to accumulate the stock during the dips.

Investors should buy the scrip on all declines to Rs.400 levels and target for a Rs.600 with a holding period of 12-15 months.

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Ingenious Investor
Equity Research Division

Ravina Consulting
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