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Strides Arcolab
Management Meet: Key takeaways!
Event
We met management of Strides last week and came back comfortable on
our thesis on the name. We maintain our OP rating and TP of Rs485.
Impact
Speciality business (Agila) poised for growth: Recent USFDA
approval for the new facilities in Bangalore should help raise capacity
utilization significantly (from currently ~30%); thereby rationalizing fixed
costs in the coming quarters. STR continues to guide for commercialization
~ 50 FDA approved products by end CY11 (was 10 products in end CY10).
Oncology portfolio to start contributing in 2HCY11: STR expects 3-5
ANDA (Onco) approvals by the USFDA in 2HCY11 covering total market
size of < US$1b (40 oncology drugs out-licensed to Pfizer for the US
market have an LMV of ~US$9b).
USFDA approval for Penem facility (Campos) expected in 2HCY11:
USFDA inspection is anticipated in 3QCY11 with likely product approval
(Meropenem, Imipenem) in 2HCY11. STR has collaboration with a large US
injectable company for marketing. EU approval also anticipated in 2HCY11.
Given limited competition, Penems should be a significant growth driver.
On track to meet CY11 Guidance: STR remains confident to meet its
CY11 guidance. STR has guided for CY11 consolidated sales of Rs22b and
EBITDA in the range of Rs4.4b to Rs4.8b. Further, STR has guided to grow
Specialties revenue by 45% to Rs10b and achieve EBITDA margins of 28 -
30% in the segment. Our estimate is at the upper end of the guidance.
FCF generation key: With a significant capex cycle (Rs8bn from CY06–09)
now behind STR, strong free cash flow generation is key for the re-rating
ahead. Management is guiding to generate ~ Rs1.5b in FCF in CY11 which if
achieved will add to market’s comfort on STR’s commitment to financial
discipline going forward. FCCB repayment of US$117m (including YTM) is
due in June-12 and STR has a strategy to meet the same through licensing
income, internal accruals and potential divestment of a non-core business.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs485.00 based on a EV/EBITDA methodology.
Catalyst: 1) Momentum in speciality segment sales – 2HCY11 key
Action and recommendation
Valuations are attractive, with STR trading at a PER of 11x CY11E earnings
and at an EV/EBITDA of 6.5x CY11E, significant discounts to its peers.
We maintain our Outperform rating. Risks to our thesis are a lack of financial
discipline and significant goodwill of Rs14bn (vs. net worth of Rs14bn).
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