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Q4CY11 results beat estimates, healthy performance despite lower
contribution from sterile business
Strides Arcolabs’ (STAR) topline grew 50% YoY to ` 6.98bn, led by higherthan-
expected revenue contribution from the pharma division at ` 4.08bn
(up 63.8% YoY).
Revenue from specialty business saw a slight moderation in growth during
the quarter at ` 2.73bn (up 23.6% YoY) restrained by subdued performance
in Brazil, where the company shifted its marketing strategy from distributor
channels to its own front-ended model. Licensing income for the quarter
stood at ` 1.7bn (Q4CY10: ` 973mn).
Growth in pharma business was driven by higher-than-expected contribution
from HIV segment and high growth in Indian brands. African business also
witnessed stable growth amidst civil and political unrest.
EBITDA margins stood lower by 310bps YoY at 15.6% due to higher other
expenses (up 440bps YoY at 25.2% of sales) which included one-off loss of
` 310mn on Brazilian front-ended operations. Adjusted for that, EBITDA
margins stood 20%.
STAR recorded net MTM gain of ` 602mn (includes ` 800mn gain on
restatement of assets in Ascent Pharma). PAT after minority interest and
excluding extraordinary items grew 85.9% YoY to ` 102mn.
The management has deferred its guidance for CY12E for the time being
due to uncertainity over timely regulatory approvals and outcome of patent
litigations. However, they indicated of high growth potential in sterile business,
mainly aided by launch of 36 products this year and higher contribution from
recently FDA approved Penem facility in Brazil.
Q4CY11 Result
Revenue grew 50% YoY to ` 6.98bn, mainly driven by higher-than-expected
revenue contribution from pharma business at ` 4.08bn (up 63.8% YoY). EBITDA
margin for pharma business stood at 11%.
Specialty business saw a slight moderation in growth at ` 2.73bn (up 23.6
YoY). EBITDA margins stood at 28%. Licensing income for the quarter grew
74.6% YoY to ` 1.7bn.
Consolidated EBITDA margins shrunk 310bps to 15.6%, deterred by higher other
expenses at 25.2% of sales (up 440bps) which included one-time loss of `
310mn on Brazilian operations. Raw material costs too increased to 47.6% of
sales (up 90bps YoY) while employee costs declined to 11.6% of sales (down
220bps YoY).
During the quarter, interest cost grew 12.4% YoY to ` 507mn while depreciation
increased by 70.2% YoY to ` 298mn. PBT excluding extraordinary items stood
at ` 285mn (down 1.5% YoY).
Extraordinary items (EOI) for the quarter include MTM gain of ` 602mn on net
foreign assets, of which ` 800mn was on restatement of assets in Ascent Pharma.
The company also recorded loss on sale of investments of ` 20mn.
PAT, after minority interest and excluding EOI, grew 85.9% YoY to ` 102mn.
Key takeaways from the conference call
Specialties division
The company received USFDA approval for its Penems facility in Brazil which
currently has three products commercialized in markets except US & Europe.
Despite mass genericization, the global market for these products is estimated
at USD 1.5bn and is still growing.
The company has built up 4-5 months of inventory for 36 approved products
which will enjoy a full year of sale in 2012. Optimum commercialization of these
products was delayed due to the 120 day time lag incurred on transferring them
to facilities with higher capacities. However, the company expects to file for 50-
60 products during CY12 from these newly approved facilities and will see no
such time-lag.
Till date, the company has received final approval for 58 products of which 33
have been commercialized and the balance will be launched in CY12.
Specifically in US, the company had made 38 filings in oncology segment (14
approved), while another 60 are under development. Opthalmics segment has
been identified as a new opportunity by STAR and will file for 14 products 2012.
The company will also have filed 14 FTF opportunities by end of CY12 along
with a couple of 505b2 applications.
STAR has shifted its Brazil operations from a distribution model to a front-ended
model, through its 52% subsidiary focused on marketing. This subsidiary is yet
to break even and has incurred losses amounting to ` 650mn for CY11. However,
the company is seeing gradual turnaround in the Brazilian front-ended operations
in the running quarter and expects it to generate profits in CY12.
Drug shortage in the US continues to present a favourable market condition for
STAR. However, the management has clarified that they will utilize this situation
to bag long-term contracts rather than exploiting on the short-term price
inconsistencies.
For the longer run, the company’s biosimilar subsidiary- Inbiopro, continues to
develop a rich pipeline for the biosimilars opportunity and is on track to introduce
the first biosimilar product by end of 2013.
As of date, the company has FDA approval for six sterile facilities.
Pharma division
The company sold its Ascent Pharma business to Watson for AUD 375mn.
Ascent Pharma had recorded total sales of ` 8.3bn for CY11 along with an
EBITDA of ` 1.05bn. The transaction has been completed as of 24th January
2012. The company will receive USD 265mn from the sale (post tax and after
AUD 50mn of debt repayment relating to Ascent). The rest of the proceeds will
be utilized towards debt reduction - includes FCCB redemption of USD 116mn
(including premium).
The company’s flagship brand Renerve generates sales of ` 340mn and grew
45% YoY.
Financials
Gross debt position as of Feb-12 stands at ` 22.5bn (Dec-11: ` 25.6bn; Dec-10:
` 20.1bn). Net-debt/equity ratio pulled down to 0.7x as of Feb-12.
Cash in books stands at ` 10.5bn as of Feb-12 (Dec-11: ` 2.6bn; Dec-10: `
3.4bn).
The company clarified that gross block (incl. WIP) of ` 13bn, as of Dec-11,
includes only ` 200mn pertaining to Ascent Pharma. This figure will increase by
` 1bn – 1.5bn as additional capex is incurred.
Goodwill on books stands at ` 19bn as of Dec-11 and will be reduced by ` 3bn
– 4bn after the Ascent Pharma sale.
Capex guidance for CY12E stands at USD 15mn.
The management has deferred its guidance for CY12E for the time being due to
uncertainity over timely regulatory approvals and outcome of patent litigations.
Valuations
STAR stands to benefit from the current drug shortages in the US as global players
like Hospira experience manufacturing compliance issues. FDA approval to its
Bangalore sterile and oncology facilities allows it to move the approved products
(25 of them in CY12E) towards commercialisation.
We expect 17% earnings growth over CY11-13E. Increased contribution from sterile
segment, turnaround in front-ended Brazilian operations will lead to margin expansion.
The divestment of Ascent Pharma business has strengthened its Balance Sheet
(Net Debt/Equity - 0.7x) while also its capex cycle is nearing an end. This shall
result in higher return ratios going forward. At CMP of ` 533, the stock trades at
11.8xCY12E and 10.1xCY13E earnings. We recommend Accumulate on the stock
with a revised target price of ` 583 (11x CY13E earnings).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Q4CY11 results beat estimates, healthy performance despite lower
contribution from sterile business
Strides Arcolabs’ (STAR) topline grew 50% YoY to ` 6.98bn, led by higherthan-
expected revenue contribution from the pharma division at ` 4.08bn
(up 63.8% YoY).
Revenue from specialty business saw a slight moderation in growth during
the quarter at ` 2.73bn (up 23.6% YoY) restrained by subdued performance
in Brazil, where the company shifted its marketing strategy from distributor
channels to its own front-ended model. Licensing income for the quarter
stood at ` 1.7bn (Q4CY10: ` 973mn).
Growth in pharma business was driven by higher-than-expected contribution
from HIV segment and high growth in Indian brands. African business also
witnessed stable growth amidst civil and political unrest.
EBITDA margins stood lower by 310bps YoY at 15.6% due to higher other
expenses (up 440bps YoY at 25.2% of sales) which included one-off loss of
` 310mn on Brazilian front-ended operations. Adjusted for that, EBITDA
margins stood 20%.
STAR recorded net MTM gain of ` 602mn (includes ` 800mn gain on
restatement of assets in Ascent Pharma). PAT after minority interest and
excluding extraordinary items grew 85.9% YoY to ` 102mn.
The management has deferred its guidance for CY12E for the time being
due to uncertainity over timely regulatory approvals and outcome of patent
litigations. However, they indicated of high growth potential in sterile business,
mainly aided by launch of 36 products this year and higher contribution from
recently FDA approved Penem facility in Brazil.
Q4CY11 Result
Revenue grew 50% YoY to ` 6.98bn, mainly driven by higher-than-expected
revenue contribution from pharma business at ` 4.08bn (up 63.8% YoY). EBITDA
margin for pharma business stood at 11%.
Specialty business saw a slight moderation in growth at ` 2.73bn (up 23.6
YoY). EBITDA margins stood at 28%. Licensing income for the quarter grew
74.6% YoY to ` 1.7bn.
Consolidated EBITDA margins shrunk 310bps to 15.6%, deterred by higher other
expenses at 25.2% of sales (up 440bps) which included one-time loss of `
310mn on Brazilian operations. Raw material costs too increased to 47.6% of
sales (up 90bps YoY) while employee costs declined to 11.6% of sales (down
220bps YoY).
During the quarter, interest cost grew 12.4% YoY to ` 507mn while depreciation
increased by 70.2% YoY to ` 298mn. PBT excluding extraordinary items stood
at ` 285mn (down 1.5% YoY).
Extraordinary items (EOI) for the quarter include MTM gain of ` 602mn on net
foreign assets, of which ` 800mn was on restatement of assets in Ascent Pharma.
The company also recorded loss on sale of investments of ` 20mn.
PAT, after minority interest and excluding EOI, grew 85.9% YoY to ` 102mn.
Key takeaways from the conference call
Specialties division
The company received USFDA approval for its Penems facility in Brazil which
currently has three products commercialized in markets except US & Europe.
Despite mass genericization, the global market for these products is estimated
at USD 1.5bn and is still growing.
The company has built up 4-5 months of inventory for 36 approved products
which will enjoy a full year of sale in 2012. Optimum commercialization of these
products was delayed due to the 120 day time lag incurred on transferring them
to facilities with higher capacities. However, the company expects to file for 50-
60 products during CY12 from these newly approved facilities and will see no
such time-lag.
Till date, the company has received final approval for 58 products of which 33
have been commercialized and the balance will be launched in CY12.
Specifically in US, the company had made 38 filings in oncology segment (14
approved), while another 60 are under development. Opthalmics segment has
been identified as a new opportunity by STAR and will file for 14 products 2012.
The company will also have filed 14 FTF opportunities by end of CY12 along
with a couple of 505b2 applications.
STAR has shifted its Brazil operations from a distribution model to a front-ended
model, through its 52% subsidiary focused on marketing. This subsidiary is yet
to break even and has incurred losses amounting to ` 650mn for CY11. However,
the company is seeing gradual turnaround in the Brazilian front-ended operations
in the running quarter and expects it to generate profits in CY12.
Drug shortage in the US continues to present a favourable market condition for
STAR. However, the management has clarified that they will utilize this situation
to bag long-term contracts rather than exploiting on the short-term price
inconsistencies.
For the longer run, the company’s biosimilar subsidiary- Inbiopro, continues to
develop a rich pipeline for the biosimilars opportunity and is on track to introduce
the first biosimilar product by end of 2013.
As of date, the company has FDA approval for six sterile facilities.
Pharma division
The company sold its Ascent Pharma business to Watson for AUD 375mn.
Ascent Pharma had recorded total sales of ` 8.3bn for CY11 along with an
EBITDA of ` 1.05bn. The transaction has been completed as of 24th January
2012. The company will receive USD 265mn from the sale (post tax and after
AUD 50mn of debt repayment relating to Ascent). The rest of the proceeds will
be utilized towards debt reduction - includes FCCB redemption of USD 116mn
(including premium).
The company’s flagship brand Renerve generates sales of ` 340mn and grew
45% YoY.
Financials
Gross debt position as of Feb-12 stands at ` 22.5bn (Dec-11: ` 25.6bn; Dec-10:
` 20.1bn). Net-debt/equity ratio pulled down to 0.7x as of Feb-12.
Cash in books stands at ` 10.5bn as of Feb-12 (Dec-11: ` 2.6bn; Dec-10: `
3.4bn).
The company clarified that gross block (incl. WIP) of ` 13bn, as of Dec-11,
includes only ` 200mn pertaining to Ascent Pharma. This figure will increase by
` 1bn – 1.5bn as additional capex is incurred.
Goodwill on books stands at ` 19bn as of Dec-11 and will be reduced by ` 3bn
– 4bn after the Ascent Pharma sale.
Capex guidance for CY12E stands at USD 15mn.
The management has deferred its guidance for CY12E for the time being due to
uncertainity over timely regulatory approvals and outcome of patent litigations.
Valuations
STAR stands to benefit from the current drug shortages in the US as global players
like Hospira experience manufacturing compliance issues. FDA approval to its
Bangalore sterile and oncology facilities allows it to move the approved products
(25 of them in CY12E) towards commercialisation.
We expect 17% earnings growth over CY11-13E. Increased contribution from sterile
segment, turnaround in front-ended Brazilian operations will lead to margin expansion.
The divestment of Ascent Pharma business has strengthened its Balance Sheet
(Net Debt/Equity - 0.7x) while also its capex cycle is nearing an end. This shall
result in higher return ratios going forward. At CMP of ` 533, the stock trades at
11.8xCY12E and 10.1xCY13E earnings. We recommend Accumulate on the stock
with a revised target price of ` 583 (11x CY13E earnings).
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