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Topline marginally ahead of estimates; an operationally strong quarter
Strides Arcolab’s Q1CY12 revenue (including 24 days of Ascent Pharma sales)
grew 7.3% YoY to ` 5.34bn. However, the topline on a like-to-like basis grew
40% YoY to ` 4.95bn. Licensing income for the quarter stood at ` 640mn.
Highlight of this growth was healthy performance in the specialty division driven
by new product launches and benefit of operating leverage. Core revenue from
the division (ex licensing income) more than doubled to ` 2.74bn with operating
margins at 26%.
The company has acquired an FDA approved sterile formulations facility to
effectively capitalize on the US drug shortage opportunity. Its existing capacities
(including non-oncology) are already tied up.
The Pharma division’s revenue on a like-to-like basis grew 37% YoY to ` 1.58bn
with its core operating margin (ex licensing income) at 19% for the quarter.
Operating margin increased by 450bps YoY to 24.9% mainly due to lower other
expenses (down 270bps YoY) and raw material costs (down 110bps YoY).
The exceptional items for the quarter include (a) forex loss of ` 250mn, (b) loss
of ` 15mn related to fair value of options and (c) profit on sale of investments of
` 6.32bn (mainly pertaining to Ascent sale).
Recurring PAT (adjusted for tax impact and excl. exceptional items) grew 126%
YoY to ` 608mn (` 269mn in Q1CY11).
At the same time, the management indicated of high growth potential in sterile
business, to be aided by launch of 31 products this year and higher contribution
from Penem exports from Brazilian facility. To reflect the benefit of operating
leverage on commercialisation of these products, we have revised our earnings
estimate upward by 4.7%/4.2% for CY12E/CY13E.
Q1CY12 Result
Strides Arcolab’s Q1CY12 revenue (including 24 days of Ascent Pharma sales)
grew 7.3% YoY to ` 5.34bn. However, the topline on a like-to-like basis grew
40% YoY to ` 4.95bn. Licensing income for the quarter stood at ` 640mn (`
1.1bn in Q1CY11).
The specialty division’s revenue grew 42% YoY to ` 3.37bn. However, core sales
(ex licensing income) more than doubled to ` 2.74bn (` 1.35bn in Q1CY11).
Core operating margins stood at 26%.
The Pharma division’s revenue on a like-to-like basis grew 37% YoY to ` 1.58bn
with its core operating margin (ex licensing income) at 19% for the quarter.
Operating margin increased by 450bps YoY to 24.9% mainly due to lower other
expenses (down 270bps YoY) at 16.7% of sales and raw material costs (down
110bps YoY) at 46% of sales. Employee cost also stood lower by 70bps YoY at
12.4% of sales. Operating margin on a like-to-like basis (excl. Ascent business)
reflects a similar trend of 420bps YoY increase to 27.7% from 23.5% in Q1CY11.
Interest cost declined 9.2% YoY to ` 390mn (post debt repayment - net debt/
equity has reduced from 1.67x to 0.63x).
PBT (excl. extra ordinary items) stood at ` 761mn, up 89.6% YoY. The
exceptional items for the quarter include (a) forex loss of ` 250mn, (b) loss of `
15mn related to fair value of options and (c) profit on sale of investments of `
6.32bn (mainly pertaining to Ascent sale).
Recurring PAT (adjusted for tax impact and excl. exceptional items) grew 126%
YoY to ` 608mn (` 269mn in Q1CY11).
Earnings concall – Key takeaways:
The prevailing of drug shortages in regulated markets continues to present a
favourable opportunity for Strides Arcolab. The management has actively
participated in resolving 9-10 shortages which has earned them long-term
contracts from GPOs.
Due to the long-term nature of these contracts, its existing capacities (including
the non-oncology facility) are currently booked and expected to be tied-up till
CY14E.
In order to effectively capitalize on the opportunity from drug shortages, the
company has acquired an FDA approved sterile formulations facility for a cash
consideration of ` 1.25bn. Two blocks with a capacity of 97 mn units (nonpenicillin,
non-cephalosporins injectables) will be commercialized by Q3CY12
and the company will incur capex of USD 7mn to increase this capacity to
200mn units by CY13E. The acquisition is EPS accretive.
Its Polish facility, which is intended to cater to the US market, will be inspected
by the FDA during this quarter. The facility is already being utilized to meet the
drug shortages in Canada - this upside is expected in coming quarters.
The company obtains approximately 33% of its specialties sales from US, of
which the Pfizer supply deal constitutes a major proportion.
The management indicated of the GSK tie-up being on track; shipment of seveneight
products (of total 10) has commenced as per the deal.
Healthy operational performance in Brazilian unit was attributed to the enoxaparin
shortage opportunity which may not be sustainable once the innovator resolves
manufacturing issues.
Valuation
STAR stands to benefit from the current drug shortages in the US as global players
like Hospira experience manufacturing compliance issues. A total of 31 products
have been approved by the FDA and will be launched in CY12E which shall
consequently accrue benefit of operating leverage.
We expect 36% earnings growth over CY11-13E. Increased contribution from
steriles, uptick in profitability from the pharma division and low debt gearing aids
earnings growth.
Further, with the capex cycle nearing the end, return ratios will observe an uptick.
At CMP of ` 645, the stock trades at 13.7xCY12E and 11.7xCY13E earnings. We
recommend Accumulate on the stock with a revised target price of ` 715 (13x
CY13E earnings).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Topline marginally ahead of estimates; an operationally strong quarter
Strides Arcolab’s Q1CY12 revenue (including 24 days of Ascent Pharma sales)
grew 7.3% YoY to ` 5.34bn. However, the topline on a like-to-like basis grew
40% YoY to ` 4.95bn. Licensing income for the quarter stood at ` 640mn.
Highlight of this growth was healthy performance in the specialty division driven
by new product launches and benefit of operating leverage. Core revenue from
the division (ex licensing income) more than doubled to ` 2.74bn with operating
margins at 26%.
The company has acquired an FDA approved sterile formulations facility to
effectively capitalize on the US drug shortage opportunity. Its existing capacities
(including non-oncology) are already tied up.
The Pharma division’s revenue on a like-to-like basis grew 37% YoY to ` 1.58bn
with its core operating margin (ex licensing income) at 19% for the quarter.
Operating margin increased by 450bps YoY to 24.9% mainly due to lower other
expenses (down 270bps YoY) and raw material costs (down 110bps YoY).
The exceptional items for the quarter include (a) forex loss of ` 250mn, (b) loss
of ` 15mn related to fair value of options and (c) profit on sale of investments of
` 6.32bn (mainly pertaining to Ascent sale).
Recurring PAT (adjusted for tax impact and excl. exceptional items) grew 126%
YoY to ` 608mn (` 269mn in Q1CY11).
At the same time, the management indicated of high growth potential in sterile
business, to be aided by launch of 31 products this year and higher contribution
from Penem exports from Brazilian facility. To reflect the benefit of operating
leverage on commercialisation of these products, we have revised our earnings
estimate upward by 4.7%/4.2% for CY12E/CY13E.
Q1CY12 Result
Strides Arcolab’s Q1CY12 revenue (including 24 days of Ascent Pharma sales)
grew 7.3% YoY to ` 5.34bn. However, the topline on a like-to-like basis grew
40% YoY to ` 4.95bn. Licensing income for the quarter stood at ` 640mn (`
1.1bn in Q1CY11).
The specialty division’s revenue grew 42% YoY to ` 3.37bn. However, core sales
(ex licensing income) more than doubled to ` 2.74bn (` 1.35bn in Q1CY11).
Core operating margins stood at 26%.
The Pharma division’s revenue on a like-to-like basis grew 37% YoY to ` 1.58bn
with its core operating margin (ex licensing income) at 19% for the quarter.
Operating margin increased by 450bps YoY to 24.9% mainly due to lower other
expenses (down 270bps YoY) at 16.7% of sales and raw material costs (down
110bps YoY) at 46% of sales. Employee cost also stood lower by 70bps YoY at
12.4% of sales. Operating margin on a like-to-like basis (excl. Ascent business)
reflects a similar trend of 420bps YoY increase to 27.7% from 23.5% in Q1CY11.
Interest cost declined 9.2% YoY to ` 390mn (post debt repayment - net debt/
equity has reduced from 1.67x to 0.63x).
PBT (excl. extra ordinary items) stood at ` 761mn, up 89.6% YoY. The
exceptional items for the quarter include (a) forex loss of ` 250mn, (b) loss of `
15mn related to fair value of options and (c) profit on sale of investments of `
6.32bn (mainly pertaining to Ascent sale).
Recurring PAT (adjusted for tax impact and excl. exceptional items) grew 126%
YoY to ` 608mn (` 269mn in Q1CY11).
Earnings concall – Key takeaways:
The prevailing of drug shortages in regulated markets continues to present a
favourable opportunity for Strides Arcolab. The management has actively
participated in resolving 9-10 shortages which has earned them long-term
contracts from GPOs.
Due to the long-term nature of these contracts, its existing capacities (including
the non-oncology facility) are currently booked and expected to be tied-up till
CY14E.
In order to effectively capitalize on the opportunity from drug shortages, the
company has acquired an FDA approved sterile formulations facility for a cash
consideration of ` 1.25bn. Two blocks with a capacity of 97 mn units (nonpenicillin,
non-cephalosporins injectables) will be commercialized by Q3CY12
and the company will incur capex of USD 7mn to increase this capacity to
200mn units by CY13E. The acquisition is EPS accretive.
Its Polish facility, which is intended to cater to the US market, will be inspected
by the FDA during this quarter. The facility is already being utilized to meet the
drug shortages in Canada - this upside is expected in coming quarters.
The company obtains approximately 33% of its specialties sales from US, of
which the Pfizer supply deal constitutes a major proportion.
The management indicated of the GSK tie-up being on track; shipment of seveneight
products (of total 10) has commenced as per the deal.
Healthy operational performance in Brazilian unit was attributed to the enoxaparin
shortage opportunity which may not be sustainable once the innovator resolves
manufacturing issues.
Valuation
STAR stands to benefit from the current drug shortages in the US as global players
like Hospira experience manufacturing compliance issues. A total of 31 products
have been approved by the FDA and will be launched in CY12E which shall
consequently accrue benefit of operating leverage.
We expect 36% earnings growth over CY11-13E. Increased contribution from
steriles, uptick in profitability from the pharma division and low debt gearing aids
earnings growth.
Further, with the capex cycle nearing the end, return ratios will observe an uptick.
At CMP of ` 645, the stock trades at 13.7xCY12E and 11.7xCY13E earnings. We
recommend Accumulate on the stock with a revised target price of ` 715 (13x
CY13E earnings).
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