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Strides Arcolab's operational performance for 1QCY11 was in line with our expectations. Key highlights:
Topline grew 30.5% YoY to Rs4.87b (v/s our estimate of 28.3% YoY to Rs4.79b), EBITDA grew 17.7% YoY to
Rs917m (v/s our estimate of Rs877m), and recurring PAT declined 15.4% YoY to Rs292m (v/s our estimate of
Rs386m).
Topline growth was led by the specialty segment, which reported doubling in revenue to Rs2.4b (v/s our estimate of
Rs2.1b), albeit on a small base. However, the pharma segment reported muted growth of 1% YoY to Rs2.6b (v/s our
estimate of Rs2.7b) due to cautious approach towards low margin institutional business.
EBITDA grew 17.7% YoY to Rs917m (v/s our estimate of Rs877m) while EBITDA margin declined by 210bp YoY to
18.8% (v/s our estimate of 18.3%). EBITDA margin was higher than estimated due to booking of higher licensing
income. Excluding this, core EBITDA margin declined 304bp to 9.5% (v/s our estimate of 12.9%).
Adjusted PAT declined 15.4% YoY to Rs292m against our estimate of Rs386m primarily due to higher than expected
tax provisions (tax rate of 16.5% v/s our estimate of 15%) and lower other income.
Strides Arcolab is set to catapult into a specialty company, with revenue contribution from this segment likely to rise from
27% in CY09 to 47% in CY12. The company has an impressive product pipeline in the specialty segment. Besides, large
manufacturing capacities (Rs15b capex over CY06-09) are in place to support a revenue scale-up and best-in-class
marketing partners like Pfizer and GSK will lead to sustainable revenue growth. We expect Strides to clock earnings
CAGR of 31.2% over CY10-12, led by ramp-up in revenue from the sterile injectables (SI) segment and core EBITDA
margin expansion in line with changing product mix and higher capacity utilization. Return ratios are set to improve over
CY10-12 and gearing is likely to decline from 2x in CY10 to 1.6x in CY12. The stock trades at 13.6x CY11E and 10.9x
CY12E earnings. We maintain Buy, with target price of Rs473.
Performance led by specialty segment
Strides’ topline grew 30.5% YoY to Rs4.87b (v/s our estimate of 28.3% YoY to Rs4.79b),
EBITDA grew 17.7% YoY to Rs917m (v/s our estimate of Rs877m), and recurring PAT
declined 15.4% YoY to Rs292m (v/s our estimate of Rs386m).
Topline growth was led by the specialty segment, which reported doubling of revenue to
Rs2.4b (v/s our estimate of Rs2.1b), albeit on a small base. Licensing income from marketing
partners (included in specialty segment revenue) grew 34.4% YoY to Rs1.12b (v/s our
estimate of Rs694m). Excluding licensing income, specialty segment product revenue
tripled to Rs1.25b (v/s our estimate of Rs1.37b), led by consolidation of Campos facility in
Brazil, which has yielded revenue of ~Rs620m for the quarter. The management has
guided revenue of Rs10b from this business (including Rs2.8b of licensing income) for
CY11.
The pharma segment reported muted growth of 1% YoY to Rs2.6b (v/s our estimate of
Rs2.7b) due to cautious approach towards low margin institutional business. The
management expects growth to bounce back from 2QCY11 on account of better institutional
business, supported by low cost sourcing of raw material.
Specialty business in US to see significant ramp-up
The management indicated that the specialty business in US will see significant ramp-up
on the back of USFDA approval for the company’s new SI facility at Bangalore. The
company is now in the process of shifting manufacturing of all the approved injectable
products to the new facility, which would help eliminate the capacity constraints. Strides
currently has 35 ANDA approvals in the sterile segment in US but it has launched only 10
products due to capacity constraints. Until recently, it had only one USFDA-approved
sterile manufacturing facility. The approval for new sterile facility will accelerate the
launch of these products in the US market. The management expects to launch an additional
40 products in the US by the end of CY11, including 25 currently approved products. The
currently approved products represent a market opportunity of US$750m. Strides expects
to garner 15-25% market share in the products it has launched in the US, backed by
Pfizer’s strong marketing and distribution set-up and lower competition.
Cutting CY11 earnings estimate by 7.5%; maintaining CY12 earnings
estimate
Based on 1QCY11 results and management guidance, we are revising our revenue
estimates for CY11 and CY12 by 5% and 9%, respectively. Our estimates factor in
the strong growth expected in the specialty segment in regulated markets.
However, based on (1) lower than expected core margins for the quarter, impacted by
higher front-end expenses in Brazilian distribution business, (2) management guidance
of further pressure on Brazilian business margins, and (3) lower other income, we are
cutting our EPS estimate for CY11 by 7.5% to Rs29/share. However, we maintain
our EPS estimate for CY12, backed by margin expansion.
Outlook and valuation
Strides Arcolab is set to catapult into a specialty company, with revenue contribution from
this segment likely to rise from 27% in CY09 to 47% in CY12. The company has an
impressive product pipeline in the specialty segment. Besides, large manufacturing capacities
(Rs15b capex over CY06-09) are in place to support a revenue scale-up and best-in-class
marketing partners like Pfizer and GSK will lead to sustainable revenue growth. We expect
Strides to clock earnings CAGR of 31.2% over CY10-12, led by ramp-up in revenue from
the sterile injectables (SI) segment and core EBITDA margin expansion in line with changing
product mix and higher capacity utilization. Return ratios are set to improve over CY10-12
and gearing is likely to decline from 2x in CY10 to 1.6x in CY12. The stock trades at 13.6x
CY11E and 10.9x CY12E earnings. We maintain Buy, with target price of Rs473.
Company description
Established in 1990, Strides is an integrated manufacturer
and exporter of finished pharmaceutical dosage forms –
both branded and generic – with 14 manufacturing facilities
in six countries. It has collaborations with five of the top-
10 global pharmaceutical players and a presence in over
75 countries. Strides recently reorganized its business into
three divisions – specialty, pharmaceuticals and branded
generics.
Key investment arguments
Strides is set to catapult into a specialty company, with
revenue contribution from this segment likely to rise
from 27% in CY09 to 47% in CY12.
The company has an impressive product pipeline in
the specialty segment, with 35 product approvals and
80 ANDAs awaiting approvals.
Large manufacturing capacities (Rs22b capex over
CY06-10) are in place to support a revenue scale-up
and best-in-class marketing partners like Pfizer and
GSK will help to achieve sustainable revenue growth
Key investment risks
If Strides does not get timely approval for a large product
pipeline, its revenue could be impacted.
It does not have API manufacturing capacities and
sources its API requirements from elsewhere. This
leaves it exposed to risks like unavailability of raw
material and price fluctuations. That is a reason for
Strides' volatile margins.
Recent developments
Has fulfilled the entire financial commitment of
US$182m towards acquisitions from Aspen.
Valuation and view
We expect Strides to clock earnings CAGR of 31.2%
over CY10-12.
Return ratios are set to improve over CY10-12 and
gearing will decline from 2x in CY10 to 1.6x in CY12.
The stock trades at 13.6x CY11E and 10.9x CY12E
earnings. We maintain Buy.
Sector view
The SI segment and branded generics segment are likely
to enjoy better profitability and growth, going forward.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strides Arcolab's operational performance for 1QCY11 was in line with our expectations. Key highlights:
Topline grew 30.5% YoY to Rs4.87b (v/s our estimate of 28.3% YoY to Rs4.79b), EBITDA grew 17.7% YoY to
Rs917m (v/s our estimate of Rs877m), and recurring PAT declined 15.4% YoY to Rs292m (v/s our estimate of
Rs386m).
Topline growth was led by the specialty segment, which reported doubling in revenue to Rs2.4b (v/s our estimate of
Rs2.1b), albeit on a small base. However, the pharma segment reported muted growth of 1% YoY to Rs2.6b (v/s our
estimate of Rs2.7b) due to cautious approach towards low margin institutional business.
EBITDA grew 17.7% YoY to Rs917m (v/s our estimate of Rs877m) while EBITDA margin declined by 210bp YoY to
18.8% (v/s our estimate of 18.3%). EBITDA margin was higher than estimated due to booking of higher licensing
income. Excluding this, core EBITDA margin declined 304bp to 9.5% (v/s our estimate of 12.9%).
Adjusted PAT declined 15.4% YoY to Rs292m against our estimate of Rs386m primarily due to higher than expected
tax provisions (tax rate of 16.5% v/s our estimate of 15%) and lower other income.
Strides Arcolab is set to catapult into a specialty company, with revenue contribution from this segment likely to rise from
27% in CY09 to 47% in CY12. The company has an impressive product pipeline in the specialty segment. Besides, large
manufacturing capacities (Rs15b capex over CY06-09) are in place to support a revenue scale-up and best-in-class
marketing partners like Pfizer and GSK will lead to sustainable revenue growth. We expect Strides to clock earnings
CAGR of 31.2% over CY10-12, led by ramp-up in revenue from the sterile injectables (SI) segment and core EBITDA
margin expansion in line with changing product mix and higher capacity utilization. Return ratios are set to improve over
CY10-12 and gearing is likely to decline from 2x in CY10 to 1.6x in CY12. The stock trades at 13.6x CY11E and 10.9x
CY12E earnings. We maintain Buy, with target price of Rs473.
Performance led by specialty segment
Strides’ topline grew 30.5% YoY to Rs4.87b (v/s our estimate of 28.3% YoY to Rs4.79b),
EBITDA grew 17.7% YoY to Rs917m (v/s our estimate of Rs877m), and recurring PAT
declined 15.4% YoY to Rs292m (v/s our estimate of Rs386m).
Topline growth was led by the specialty segment, which reported doubling of revenue to
Rs2.4b (v/s our estimate of Rs2.1b), albeit on a small base. Licensing income from marketing
partners (included in specialty segment revenue) grew 34.4% YoY to Rs1.12b (v/s our
estimate of Rs694m). Excluding licensing income, specialty segment product revenue
tripled to Rs1.25b (v/s our estimate of Rs1.37b), led by consolidation of Campos facility in
Brazil, which has yielded revenue of ~Rs620m for the quarter. The management has
guided revenue of Rs10b from this business (including Rs2.8b of licensing income) for
CY11.
The pharma segment reported muted growth of 1% YoY to Rs2.6b (v/s our estimate of
Rs2.7b) due to cautious approach towards low margin institutional business. The
management expects growth to bounce back from 2QCY11 on account of better institutional
business, supported by low cost sourcing of raw material.
Specialty business in US to see significant ramp-up
The management indicated that the specialty business in US will see significant ramp-up
on the back of USFDA approval for the company’s new SI facility at Bangalore. The
company is now in the process of shifting manufacturing of all the approved injectable
products to the new facility, which would help eliminate the capacity constraints. Strides
currently has 35 ANDA approvals in the sterile segment in US but it has launched only 10
products due to capacity constraints. Until recently, it had only one USFDA-approved
sterile manufacturing facility. The approval for new sterile facility will accelerate the
launch of these products in the US market. The management expects to launch an additional
40 products in the US by the end of CY11, including 25 currently approved products. The
currently approved products represent a market opportunity of US$750m. Strides expects
to garner 15-25% market share in the products it has launched in the US, backed by
Pfizer’s strong marketing and distribution set-up and lower competition.
Cutting CY11 earnings estimate by 7.5%; maintaining CY12 earnings
estimate
Based on 1QCY11 results and management guidance, we are revising our revenue
estimates for CY11 and CY12 by 5% and 9%, respectively. Our estimates factor in
the strong growth expected in the specialty segment in regulated markets.
However, based on (1) lower than expected core margins for the quarter, impacted by
higher front-end expenses in Brazilian distribution business, (2) management guidance
of further pressure on Brazilian business margins, and (3) lower other income, we are
cutting our EPS estimate for CY11 by 7.5% to Rs29/share. However, we maintain
our EPS estimate for CY12, backed by margin expansion.
Outlook and valuation
Strides Arcolab is set to catapult into a specialty company, with revenue contribution from
this segment likely to rise from 27% in CY09 to 47% in CY12. The company has an
impressive product pipeline in the specialty segment. Besides, large manufacturing capacities
(Rs15b capex over CY06-09) are in place to support a revenue scale-up and best-in-class
marketing partners like Pfizer and GSK will lead to sustainable revenue growth. We expect
Strides to clock earnings CAGR of 31.2% over CY10-12, led by ramp-up in revenue from
the sterile injectables (SI) segment and core EBITDA margin expansion in line with changing
product mix and higher capacity utilization. Return ratios are set to improve over CY10-12
and gearing is likely to decline from 2x in CY10 to 1.6x in CY12. The stock trades at 13.6x
CY11E and 10.9x CY12E earnings. We maintain Buy, with target price of Rs473.
Company description
Established in 1990, Strides is an integrated manufacturer
and exporter of finished pharmaceutical dosage forms –
both branded and generic – with 14 manufacturing facilities
in six countries. It has collaborations with five of the top-
10 global pharmaceutical players and a presence in over
75 countries. Strides recently reorganized its business into
three divisions – specialty, pharmaceuticals and branded
generics.
Key investment arguments
Strides is set to catapult into a specialty company, with
revenue contribution from this segment likely to rise
from 27% in CY09 to 47% in CY12.
The company has an impressive product pipeline in
the specialty segment, with 35 product approvals and
80 ANDAs awaiting approvals.
Large manufacturing capacities (Rs22b capex over
CY06-10) are in place to support a revenue scale-up
and best-in-class marketing partners like Pfizer and
GSK will help to achieve sustainable revenue growth
Key investment risks
If Strides does not get timely approval for a large product
pipeline, its revenue could be impacted.
It does not have API manufacturing capacities and
sources its API requirements from elsewhere. This
leaves it exposed to risks like unavailability of raw
material and price fluctuations. That is a reason for
Strides' volatile margins.
Recent developments
Has fulfilled the entire financial commitment of
US$182m towards acquisitions from Aspen.
Valuation and view
We expect Strides to clock earnings CAGR of 31.2%
over CY10-12.
Return ratios are set to improve over CY10-12 and
gearing will decline from 2x in CY10 to 1.6x in CY12.
The stock trades at 13.6x CY11E and 10.9x CY12E
earnings. We maintain Buy.
Sector view
The SI segment and branded generics segment are likely
to enjoy better profitability and growth, going forward.
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