All focus on Shasun amalgamation… Strides Arcolab :: ICICI Securities, pdf link

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Strides Arcolab: Grab it for dividend + cash + pharma…: ICICI Sec

According to the modified Agila deal, Strides has received US$1.5 billion
from Mylan Inc while the latter has opted to hold back the remaining
US$250 million subject to fulfilment of certain conditions in the backdrop
of the warning letter to Agila’s Bangalore facility. The company has
announced a special dividend of | 500/share. The detailed financials
incorporating the remaining pharma business and Mylan receipts will be
made available post December quarter numbers. Our valuation is based
on deal numbers and earlier pharma guidance.

Strides Arcolab: SELL :: Business Line

Outlook-Amara Raja Batteries, Nelco, Neyveli Lignite, DCB, Hero Honda, Strides Arcolab ::Business Line

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Please share your technical view on Amara Raja Batteries bought at Rs 207.

Kaushalendra Pratap Singh

Amara Raja Batteries (Rs 284.3): Amara Raja Batteries ceased its upward charge in January this year when it reversed lower from the peak at Rs 327. This decline ended after the stock lost 23 per cent from this peak with the bottom at Rs 249.

The significant point to note here is that the stock retraced around 30 per cent of the rally from the February 2011 low, during this correction. The stock has significant long-term support in the zone between Rs 230 and Rs 250. Long-term investors can hold the stock as long as it trades above Rs 230.

Sideways movement in the zone between Rs 230 and Rs 330 is possible for a few more months but this is conducive for the stock’s long-term prospects. It will imply that the stock could move beyond Rs 350 over the long-term.

Long-term supports below Rs 230 are at Rs 200 and Rs 170.

Please advise on the medium- and long-term outlook of Nelco. Can these be bought at current levels?

Anil

Nelco (Rs 42.1): The medium as well as the long-term trend in Nelco are currently down. The stock is, however, halting above key long-term support around Rs 40. Investors with a greater penchant for risk can buy the stock at these levels with stop-loss at Rs 36. Fresh purchases should, however, be avoided on a breach of this level since the target on a breach of this support is quite some way off, at Rs 21.

Key medium-term resistance is placed at Rs 65. Investors can offload part of their holding if the stock is unable to move beyond this level. Medium-term view will turn positive only on a close above Rs 80.

Kindly give your view on Neyveli Lignite Corporation bought at Rs 108 and Development Credit Bank at Rs 52. I can hold the stocks for six months.

P.S.R. Murthy

Neyveli Lignite Corporation (Rs 74.8): The trends along all time-frames are down for Neyveli Lignite Corporation. Investors can, however, draw solace from the fact that the stock is now close to its key support zone around Rs 70. This level has cushioned the stock twice already since November 2011.

Investors can, therefore, hold the stock only as long as it trades above Rs 60.

If the stock breaches this level emphatically and closes below it on a weekly basis, it will imply that the stock is heading lower to the October 2008 trough at Rs 44.

Medium-term resistances are at Rs 90 and Rs 110. The trend along this time-frame will turn positive only on a close above Rs 110.

Failure to do so will imply that the stock will continue to be under pressure. Targets on move above Rs 110 are Rs 124 and Rs 136.

Technicals-Amara Raja Batteries, Nelco, Neyveli Lignite, DCB, Hero Honda, Strides Arcolab ::Business Line

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Please share your technical view on Amara Raja Batteries bought at Rs 207.

Kaushalendra Pratap Singh

Amara Raja Batteries (Rs 284.3): Amara Raja Batteries ceased its upward charge in January this year when it reversed lower from the peak at Rs 327. This decline ended after the stock lost 23 per cent from this peak with the bottom at Rs 249.

The significant point to note here is that the stock retraced around 30 per cent of the rally from the February 2011 low, during this correction. The stock has significant long-term support in the zone between Rs 230 and Rs 250. Long-term investors can hold the stock as long as it trades above Rs 230.

Sideways movement in the zone between Rs 230 and Rs 330 is possible for a few more months but this is conducive for the stock’s long-term prospects. It will imply that the stock could move beyond Rs 350 over the long-term.

Long-term supports below Rs 230 are at Rs 200 and Rs 170.

Please advise on the medium- and long-term outlook of Nelco. Can these be bought at current levels?

Anil

Nelco (Rs 42.1): The medium as well as the long-term trend in Nelco are currently down. The stock is, however, halting above key long-term support around Rs 40. Investors with a greater penchant for risk can buy the stock at these levels with stop-loss at Rs 36. Fresh purchases should, however, be avoided on a breach of this level since the target on a breach of this support is quite some way off, at Rs 21.

Key medium-term resistance is placed at Rs 65. Investors can offload part of their holding if the stock is unable to move beyond this level. Medium-term view will turn positive only on a close above Rs 80.

Kindly give your view on Neyveli Lignite Corporation bought at Rs 108 and Development Credit Bank at Rs 52. I can hold the stocks for six months.

P.S.R. Murthy

Neyveli Lignite Corporation (Rs 74.8): The trends along all time-frames are down for Neyveli Lignite Corporation. Investors can, however, draw solace from the fact that the stock is now close to its key support zone around Rs 70. This level has cushioned the stock twice already since November 2011.

Investors can, therefore, hold the stock only as long as it trades above Rs 60.

If the stock breaches this level emphatically and closes below it on a weekly basis, it will imply that the stock is heading lower to the October 2008 trough at Rs 44.

Medium-term resistances are at Rs 90 and Rs 110. The trend along this time-frame will turn positive only on a close above Rs 110.

Failure to do so will imply that the stock will continue to be under pressure. Targets on move above Rs 110 are Rs 124 and Rs 136.

Strides Arcolab: Book profit :: Business Line

Strides Arcolab: Buy ::Business Line

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Strides Arcolabs : TP: ` 715 Accumulate: Dolat Capital

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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.

52-WEEK BLOCKBUSTER: STRIDES ARCOLAB :: Business Line

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Strides Arcolab :Target Price: ` 636 Accumulate: Dolat Capital

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Nearing the Inflexion Point…!
Strides Arcolab (STAR) is setting its base to emerge as a credible injectable player from a generic pharmaceutical
company. The divestment of Ascent Pharma business to Watson further reinforces its focus on high margin
steriles segment. Till date, the company has garnered USD 230mn as upfront licensing income (through front
end partnerships forged with Pharma MNC’s), clearly reflecting the monetizable value of its pipeline. Six of its
sterile facilities are now FDA approved which permits it to accelerate products already approved (25 of 58 final
approvals in CY12E) into the commercialization phase and also leverage on prevailing drug shortages in US.
The divestment proceeds of Ascent Pharma business shall deleverage the balance sheet while also lower capital
investment leaves upside for higher return ratios going forward. We expect 33% adjusted earnings growth over
CY11-13E, leading to an uptick in return ratios.
Investment Rationale
Transformation into a leading specialty (injectables) player
STAR has emerged from being a generic pharmaceutical player (legacy business)
to a specialty player, with increased focus on steriles (injectables). Divestment
of Ascent Pharma is a reflection of its steady progression towards this
transformation. It has reorganized its business structure with emphasis on two
broad verticals — ‘Specialties’ and ‘Pharmaceuticals’. Strides has built a strong
manufacturing platform via both the organic and inorganic route, and has an
enriching pipeline of IP assets, which it leverages through the partnership modus
operandi.
Agila Specialty – At The tipping Point
The company follows a two-pronged growth strategy — supply to JV partner
Sagent and supply to front-end partners - Pfizer Plc and GSK Plc. Manufacturing
capacity constraints limited Stride’s ability to commercialize products (33 launches
of 58 final approvals). Six of its sterile facilities are now FDA approved which
permits it to launch 25 of 62 total approved products in CY12E. We expect more
launches from its Oncology product filings (YTD - 38 filings; only 3 launched)
during CY12E. The company also stands to benefit from the current drug shortage
in the US where global players themselves (like Hospira & Sandoz) are facing
manufacturing bottlenecks. We expect the specialty segment’s revenues to grow
29% over CY11-13E and contribute 62% of sales in CY13E.
Pharmaceuticals – Legacy Continues…
Post divestment of Ascent Pharma, the residual business comprises of domestic
branded generics, anti-malaria/TB tender sales and soft gels. New product
launches and increased penetration in Emerging Markets shall aid growth
momentum, which is mainly volume-driven.
Valuations
We expect 33% adjusted earnings growth over CY11-13E. Increased contribution
from sterile segment, turnaround in front-ended Brazilian operations will lead to
margin expansion. Timely product approvals remain key to growth. At CMP, the
stock trades at 13.1x CY12E and 11.1x CY13E earnings. We recommend
Accumulate on the stock with a target price of ` 636 (12x CY13E earnings).

Strides Arcolabs :: TP: ` 583 Accumulate ::Dolat Capital,

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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.

Strides Arcolab:: TP: INR716 Buy : Motilal Oswal

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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%.

Buy Strides Arcolab; Target : Rs 590 :upgraded our rating on the stock from HOLD to BUY. : ICICI Securities (PDF Link)

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http://content.icicidirect.com/mailimages/ICICIdirect_StridesArcolab_Q4CY11.pdf


A s c e n t   g o n e ;   a l l   e y e s   o n   s p e c i a l i t i e s …
Strides Arcolab’s Q4CY11 results were far above our expectations. The
revenues increased by 50% YoY to | 698 crore, far above our expectation
of | 599 crore on account of higher than expected licensing income. The
licensing income during the quarter was | 170 crore as against our
expectation of | 50 crore and | 97 crore in the corresponding previous
period. Excluding licensing income, the base business witnessed robust
growth of 43% YoY, still slightly  below our estimates on the back of
structural changes initiated in Brazil. Despite higher licensing income,
EBITDA margins declined 310 bps YoY to 15.6% (as against our
expectation of 20.5%) on the back of translation forex losses (| 10 crore)
and one-time losses at the Brazilian  subsidiary (| 30 crore). Thanks to
forex gain of | 58.2 crore on the back of revaluation of some of the
investments in the Ascent account the net profit grew to | 68.4 crore. We
have upgraded our rating on the stock from HOLD to BUY.

Strides Arcolab::Sale of generic pharma business at US$375mn  Reliance Securities

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Sale of generic pharma business at US$375mn
 Event: Strides sold 94% holding in Ascent Pharma Health, its generic pharma
operations in Australia and Southeast Asia, to Watson Pharma, in all cash
transaction at an EV of AU$375mn (US$375mn for Strides 94% stake). Watson
acquired the remaining 6% stake from the company’s CEO. Assets worth
US$113mn are transferred to Watson as a part of this transaction.
 Rationale: The company would be utilizing the sale proceeds to fund future capital
growth in the sterile injectable sector (major focus area comprising 44% of the
total sales) along with reduction in debt, thereby improving its leverage position.
Strides has chalked out a debt reduction program of US$250mn, which includes
redemption of US$117mn (including YTM) FCCB due in June, 2012 and payment
of US$50mn debt pertaining to Ascent.
 Agreement with Pfizer remains with Strides: Ascent had entered into a distribution
and services agreement with Pfizer Australia to promote and sell the full range of
Pfizer’s established off-patent medicines to Australian pharmacies. This remains
intact with Strides. Under the agreement, Strides will promote and distribute
Pfizer’s off-patent branded medicines to pharmacies via direct distribution channel
as well as sell a number of Pfizer’s branded generics. Pfizer has around 100 drugs
in Australia. We expect this deal to significantly boost the overall revenues of
Strides.
 Impact: The deal is valued at EV/sales of 2.6x and EV/EBITDA of 19.7x with a sale
of US$160mn in CY2011E and EBITDA of US$21mn. It will improve the leverage
as the debt reduces from current US$525mn to US$275mn. Currently Strides has
a D/E ratio of 1.6x (including FCCB). Post the deal, the D/E ratio is likely to reduce
to 1.0x thereby, strengthening the balance sheet. This would reduce the interest
costs by ~US$15-20mn for CY2012, thereby, increasing profitability. Besides, the
goodwill from the books would also be reduced by ~US$50-60mn.
Outlook and Valuation
Strides has emerged leaner and stronger post restructuring its business with a clear
focus on niche specialized segments. The deal emphasizes Strides’ priority to
optimize the shareholder value by focusing on return ratios, targeting better working
capital management and reducing debt level. With the complete focus on high margin
sterile business, potential new launches, abundant capacity available, cash for
upgradation of sterile facilities, we believe the company is expected to witness a sharp
upswing in earnings and is poised for re-rating. We revise our estimates factoring the
sale of the Australian business and anticipate a 10% CAGR growth in revenues and
32% CAGR in earnings with an improving EBITDA margin for CY2010-13E. Since our
price target of Rs485 was achieved (refer our report: “Taking Big Strides” on 1st Dec
2011), post this deal, we recommend Buy on the company with an upgraded price
target of Rs650.
Risks to view
 Higher goodwill than networth could result in potential impairment
 Higher than expected competition in sterile injectables

Hold Strides Arcolab; Target :Rs 521 ::ICICI Securities

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A s c e n t   e x i t ,   s u b s t a n t i a l   v a l u e   u n l o c k i n g …
Strides has sold its subsidiary (94% holding) Ascent Pharmahealth to
Watson Pharmaceuticals for AU$353  million (US$370 million) in cash.
Ascent Pharmahealth was valued at AU$375 million. Ascent clocked
US$128 million in CY10. The management has indicated sales of Ascent
Pharma for CY11 are around US$154  million in CY11E and EBITDA is
US$19 million. Hence, the deal works out to ~2.5x sales and ~20x
EV/EBITDA, which we believe is a great bargain for the company. Strides
raked in almost 3.2x in profits if we consider the total acquisition cost of
~US$113 million through 2008-10.
ƒ Singapore facility to be transferred along with300 employees
Strides has had a presence in the Australasia market through Ascent
Pharmahealth. Ascent owns a manufacturing facility in Jurong,
Singapore, which would be transferred to Watson. Ascent sells over
400 drugs encompassing generic, OTC and skincare products,
products with well established  consumer brands and organic
skincare products in eight countries. The company has staff strength
of approximately 300 employees in Australia and Southeast Asia.
ƒ Cleansing of balance sheet
We expect the company to receive cash of around US$310 million
post taxation. Of this, US$250 million would be used to repay the
debt including FCCBs of US$117 million (debt of US$80 million and
US$37 million for YTM) due in June 2012. Post transaction cost and
executive option, the remaining cash would be used to fund the fast
growing Specialities business. We expect the gross debt to come
down to | 1100 crore from the current level of ~| 2625 crore, which
could save around ~| 55 crore of interest for CY12.
V a l u a t i o n
Exit from low margin Ascent Pharmahealth (with better bargain) is a move
in the right direction as it will improve the focus on its core specialties
business. The immediate cash inflow will ease pressure on the balance
sheet substantially. We have upgraded the target price from | 439 to
| 521 based on upward revision of the multiple from 9x to 11x and after
applying the same on a revised CY12E EPS of | 47.4.

Strides Arcolab- Specialty makes it special :: Motilal oswal,

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Specialty makes it special
Focus on specialty segment to drive 25% revenue CAGR
We met Mr Arun Kumar, Executive Vice Chariman and CEO of Strides Arcolab
(STR), who shared his views on the company's long term strategy, growth
prospects, and challenges among other things.
Specialty business to be the key long term growth driver
 STR's business focus is on the specialty segment as its key long-term value
creator and growth driver. STR has developed one of the most competitive sterile
product franchises globally with eight manufacturing facilities.
 The company is looking to divest the pharma business, (non-sterile business) if
it gets the right price. The pharma business comprises institutional business
related to antimalaria, anti-TB remedies and branded generic business in India,
Australasia and Africa, contributing ~INR12b to STR's annual revenue.
Partnership with MNCs leverages strong product pipeline
 We feels that STR's partnership with Pfizer in various regulated markets and
with GSK for 95 emerging markets has enabled Strides to leverage strong and
best in class distribution of these MNCs across the globe.
 Partnership with Pfizer, particularly the US, gives it a strong competitive advantage. STR expects to corner 15-25%
market share in the US, backed by Pfizer's strong marketing and distribution, and low competition.
STR slated to post revenue CAGR of 25% over the medium term
 STR's has raised its CY11 revenue guidance to INR25b from INR22b and is slated to grow overall revenue by 25%
CAGR in the medium term. The product portfolio of the company targets USD11b market opportunity.
 Further, given the strong product pipeline which includes High Potency drugs, Penems, Cephalosporins, Ophthalmic
and Peptides, the company is likely maintain robust licensing income of INR2.5b every year over the next few years.
Profitability to increase as capacity utilization ramps up

Buy Strides Arcolab; Target : Rs 426::ICICI Securities

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Strides Arcolab

R o b u s t   g r owt h   ami d s t   d e c l i n e   i n   l i c e n s i n g…
Strides Arcolab’s Q2CY11 numbers were above our expectation.
Revenues increased by 28% YoY to | 618.5 crore above our expectation
of | 549 crore. Excluding the licensing income, the base business
witnessed robust growth of 55% YoY  higher than our expectation. The
licensing income was | 74 crore (our expectation: | 54 crore) vs. | 134
crore in the corresponding quarter. EBITDA margins for the quarter
declined by 350 bps YoY to 23.5% (as against our expectation of 20.5%)
on expected lines due to lower licensing income and consolidation of the
Brazilian JV, which is making losses due to the tender business. Net profit
grew 50% to | 68.9 crore above our expectation of | 48 crore mainly on
account of forex gains. Due to a fall in share price, we have revised our
recommendation to BUY while retaining the target price.
ƒ Plans to launch 19 products in US markets in H2CY11
During the quarter, the company  launched six products taking the
total launches in the current half to 16 in the US market. It is
planning to launch 19 more products in the US market in the second
half. The company launched Gemcitabine (generic version of cancer
drug Gemzaar) on July 26, 2011 in the US market through Pfizer.
Total seven players have launched the product in the US market. Of
this, only three players have approvals for all three strengths.
ƒ Pharma business witnesses 51% YoY growth
The pharma business registered robust growth of 51% YoY to | 398
crore on the back of higher institutional business and increase in the
sales of soft gelatine product Ergocalciferol (Thyroid control) in US.
V a l u a t i o n
The performance in the first half of the calendar year is already ahead of
management guidance on a proportionate basis. With approval for new
facilities and likely ramp-up in product approvals, the second half is also
expected to be robust. The only overhang is high leverage and, hence, a
steep valuation discount vis-à-vis peers. We expect a gradual
improvement in leverage and return ratios once the new facilities run on
full steam. We have valued the stock at | 426 based on 9x CY12E EPS of |
47.5 with BUY rating

Strides Arcolab Management Meet: Key takeaways! ::Macquarie Research,

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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).

Strides Arcolab: Performance led by specialty segment ::Motilal Oswal

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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.

Hold Strides Arcolab; Oncology facility approval key trigger…Target :Rs 426:: ICICI Securities,

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Strides Arcolab- Oncology facility approval key trigger…
Strides Arcolab’s Q1CY11 results were a mixed bag. Revenues increased
30% YoY to | 497.3 crore, much above our expectation of | 450 crore on
account of higher licensing income (| 112.1 crore against our
expectation of | 60 crore). However, EBITDA margins declined 210 bps
YoY to 20.4% as against our expectation of 22.5% due to consolidation
of the Brazilian JV and planned shutdown of the USFDA approved
existing sterile manufacturing facility for seven weeks. EBITDA grew
18% to | 101.5 crore (in line with our expectation). Due to higher
interest cost and tax provision, net profit growth was restricted to 2%
at | 40.7 crore (our expectation: | 39.4 crore). Strides received approval
for a new sterile manufacturing facility recently. We expect Strides to
commercialise almost all approved products during the current year. We
have upgraded our target price with HOLD rating.