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Strides Arcolab's 4QCY11 operational performance was below estimates. Key highlights are:
Topline grew 51% YoY led by higher licensing income which grew 123% YoY to INR1.7b (v/s estimate INR466m)
and 126.2% YoY growth in Pharma business to INR4.1b led by business in Africa. Specialty sales (ex licensing
income) declined 31% YoY to INR1.02b due to lower revenues from Brazil due to change in distribution model.
EBITDA grew 25.8% YoY to INR972m (v/s estimate of 53% YoY growth to INR1.18b) led by higher licensing
income. However, it was pulled down by INR310m write-off in Brazil operations due to business restructuring.
Adjusted for this, EBITDA would have been INR1.28b. EBITDA margins contracted 280bp YoY to 14.2% (v/s
estimate of 17.8%) largely on account of the Brazil write-off.
We estimate adj PAT at INR197m (v/s estimate of INR483m) impacted by lower than estimated operational
performance and higher than estimated taxes. However, reported PAT stood at INR684m on account of INR800m
extraordinary gain due to re-statement of investments related to Ascent Pharma.
Strides is set to emerge as a specialty products company with revenue contribution from this segment rising from
28% in CY09 to 75% in CY13. Large manufacturing capacities are in place to support revenue scale-up, coupled with
strong marketing partners like Pfizer and GSK. We believe the sale of Ascent Pharma to Watson at an attractive
valuation will lead to significant reduction in debt. It may unlock further value from the sale of remaining Pharma
business as its focus remains on specialty business. Based on our revised estimates, we expect Strides to post 28%
EPS CAGR over CY11-13, led by (1) revenue ramp-up from steriles, and (2) substantial reduction in interest cost
owing to repayment of debt. Core EBITDA margin will expand in line with changing product mix and higher
capacity utilization. Debt-equity will decline from 2x in CY10 to 0.6x in CY13. The stock trades at 11.5x CY12E and
10.3x CY13E EPS. Maintain Buy with revised target price of INR716 (14x CY13E EPS), an upside of 36%.
Key takeaways from conference call
4QCY11 performance
4QCY11 specialty revenue was below our expectation due to change in
distribution model in Brazil. The revenues are likely to recover in CY12.
There was an extraordinary gain of INR800m related to re-statement of Ascent
Pharma investments. There was also INR300m forex loss related to FCCBs.
Strides has ~INR3.5-4b cash on balance sheet on account of un-booked licensing
income which will be recognized in P&L in future.
CY12 guidance
The management did not give any guidance for CY12, citing that many product
launches are linked to US FDA approvals and outcome of patent challenges.
However, it indicated that given the number of approvals expected in CY12 and
strong inflow of licensing income, the year should see robust performance. We
expect topline growth of 38.4% (ex Ascent Pharma) led by US specialty business.
Strides is likely to at least maintain EBITDA margin for CY12 despite growing
R&D expense and legal expenses related to Para IV fillings. The company
expects to improve profitability of Brazilian operations in CY12.
Expect USD15m capex for CY12; there will be significant reduction in the interest
cost.
Ascent Pharma transaction
Strides received USD262m net of other liabilities and tax from the Ascent
transaction.
Ascent had reported revenue of INR8.4b for CY11 and EBITDA of INR1.05b.
Outlook and valuation
Strides is set to emerge as a specialty products company with revenue contribution
from this segment rising from 28% in CY09 to 75% in CY13. It has an impressive specialty
product pipeline. Large manufacturing capacities are in place to support revenue
scale-up, coupled with strong marketing partners like Pfizer and GSK. We believe the
sale of Ascent Pharma to Watson at an attractive valuation will lead to significant
reduction in Strides' debt in the future. It may unlock further value from the sale of
remaining Pharma business as its focus remains on specialty business. Based on our
revised estimates, we expect Strides to post 28% EPS CAGR over CY11-13, led by (1)
revenue ramp-up from steriles, and (2) substantial reduction in interest cost owing to
repayment of debt. Core EBITDA margin will expand in line with changing product
mix and higher capacity utilization. Debt-equity will decline from 2x in CY10 to 0.6x in
CY13. The stock trades at 11.5x CY12E and 10.3x CY13E EPS. Maintain Buy with revised
target price of INR716 (14x CY13E EPS), an upside of 36%.
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 has reorganized its business into
three divisions, specialties, pharmaceuticals and
branded generics.
Key investment arguments
Strides is set to catapult into a specialty company
with revenue contribution from this segment set to
rise from 27% in CY09 to 75% by CY13.
The company has an impressive product pipeline in
the specialty segment with 62 product approvals and
82 ANDAs awaiting approvals.
Besides, large manufacturing capacities are in place
to support a revenue scale-up and strong marketing
partners like Pfizer and GSK will lead to sustainable
revenue growth.
Key investment risks
If Strides does not get timely approval for its large
product pipeline, its revenue could be impacted.
Strides 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
Sold generic business in Australia & Southeast Asia
to Watson for A$375m.
Valuation and view
We expect Strides to clock earnings CAGR of 28% over
CY11-13, Debt-equity will decline from 2x in CY10 to
0.6x in CY13.
Based on our revised estimates, the stock trades at
11.5x CY12E and 10.3x CY13E EPS. We maintain Buy.
Sector view
The Sterile injectable segment and branded generic
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 4QCY11 operational performance was below estimates. Key highlights are:
Topline grew 51% YoY led by higher licensing income which grew 123% YoY to INR1.7b (v/s estimate INR466m)
and 126.2% YoY growth in Pharma business to INR4.1b led by business in Africa. Specialty sales (ex licensing
income) declined 31% YoY to INR1.02b due to lower revenues from Brazil due to change in distribution model.
EBITDA grew 25.8% YoY to INR972m (v/s estimate of 53% YoY growth to INR1.18b) led by higher licensing
income. However, it was pulled down by INR310m write-off in Brazil operations due to business restructuring.
Adjusted for this, EBITDA would have been INR1.28b. EBITDA margins contracted 280bp YoY to 14.2% (v/s
estimate of 17.8%) largely on account of the Brazil write-off.
We estimate adj PAT at INR197m (v/s estimate of INR483m) impacted by lower than estimated operational
performance and higher than estimated taxes. However, reported PAT stood at INR684m on account of INR800m
extraordinary gain due to re-statement of investments related to Ascent Pharma.
Strides is set to emerge as a specialty products company with revenue contribution from this segment rising from
28% in CY09 to 75% in CY13. Large manufacturing capacities are in place to support revenue scale-up, coupled with
strong marketing partners like Pfizer and GSK. We believe the sale of Ascent Pharma to Watson at an attractive
valuation will lead to significant reduction in debt. It may unlock further value from the sale of remaining Pharma
business as its focus remains on specialty business. Based on our revised estimates, we expect Strides to post 28%
EPS CAGR over CY11-13, led by (1) revenue ramp-up from steriles, and (2) substantial reduction in interest cost
owing to repayment of debt. Core EBITDA margin will expand in line with changing product mix and higher
capacity utilization. Debt-equity will decline from 2x in CY10 to 0.6x in CY13. The stock trades at 11.5x CY12E and
10.3x CY13E EPS. Maintain Buy with revised target price of INR716 (14x CY13E EPS), an upside of 36%.
Key takeaways from conference call
4QCY11 performance
4QCY11 specialty revenue was below our expectation due to change in
distribution model in Brazil. The revenues are likely to recover in CY12.
There was an extraordinary gain of INR800m related to re-statement of Ascent
Pharma investments. There was also INR300m forex loss related to FCCBs.
Strides has ~INR3.5-4b cash on balance sheet on account of un-booked licensing
income which will be recognized in P&L in future.
CY12 guidance
The management did not give any guidance for CY12, citing that many product
launches are linked to US FDA approvals and outcome of patent challenges.
However, it indicated that given the number of approvals expected in CY12 and
strong inflow of licensing income, the year should see robust performance. We
expect topline growth of 38.4% (ex Ascent Pharma) led by US specialty business.
Strides is likely to at least maintain EBITDA margin for CY12 despite growing
R&D expense and legal expenses related to Para IV fillings. The company
expects to improve profitability of Brazilian operations in CY12.
Expect USD15m capex for CY12; there will be significant reduction in the interest
cost.
Ascent Pharma transaction
Strides received USD262m net of other liabilities and tax from the Ascent
transaction.
Ascent had reported revenue of INR8.4b for CY11 and EBITDA of INR1.05b.
Outlook and valuation
Strides is set to emerge as a specialty products company with revenue contribution
from this segment rising from 28% in CY09 to 75% in CY13. It has an impressive specialty
product pipeline. Large manufacturing capacities are in place to support revenue
scale-up, coupled with strong marketing partners like Pfizer and GSK. We believe the
sale of Ascent Pharma to Watson at an attractive valuation will lead to significant
reduction in Strides' debt in the future. It may unlock further value from the sale of
remaining Pharma business as its focus remains on specialty business. Based on our
revised estimates, we expect Strides to post 28% EPS CAGR over CY11-13, led by (1)
revenue ramp-up from steriles, and (2) substantial reduction in interest cost owing to
repayment of debt. Core EBITDA margin will expand in line with changing product
mix and higher capacity utilization. Debt-equity will decline from 2x in CY10 to 0.6x in
CY13. The stock trades at 11.5x CY12E and 10.3x CY13E EPS. Maintain Buy with revised
target price of INR716 (14x CY13E EPS), an upside of 36%.
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 has reorganized its business into
three divisions, specialties, pharmaceuticals and
branded generics.
Key investment arguments
Strides is set to catapult into a specialty company
with revenue contribution from this segment set to
rise from 27% in CY09 to 75% by CY13.
The company has an impressive product pipeline in
the specialty segment with 62 product approvals and
82 ANDAs awaiting approvals.
Besides, large manufacturing capacities are in place
to support a revenue scale-up and strong marketing
partners like Pfizer and GSK will lead to sustainable
revenue growth.
Key investment risks
If Strides does not get timely approval for its large
product pipeline, its revenue could be impacted.
Strides 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
Sold generic business in Australia & Southeast Asia
to Watson for A$375m.
Valuation and view
We expect Strides to clock earnings CAGR of 28% over
CY11-13, Debt-equity will decline from 2x in CY10 to
0.6x in CY13.
Based on our revised estimates, the stock trades at
11.5x CY12E and 10.3x CY13E EPS. We maintain Buy.
Sector view
The Sterile injectable segment and branded generic
segment are likely to enjoy better profitability and
growth going forward.
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