Stock Review: Strides Arcolab

 

The booming specialties segment will be a critical area of operations for Strides Arcolabs in days to come. Mounting debt pressure and the resulting interest costs may make it a bitter dose for the company

 

THE Bangalore-based Strides Arcolab is one of the leading integrated manufacturers of drug formulations with a focus on sterile injectibles. During the last few years, the company has exited from noncore businesses and acquired those which have helped it consolidate its ability to launch products worldwide. The company has licensing and supply partnerships with leading MNCs - Pfizer, GlaxoSmithKline, Aspen, Sandoz and Teva.

   The company has two major business segments of pharmaceuticals and specialties. The fast-growing specialties segment, including beta-lactums, cephalosporins, oncolytics and penems, which now contributes 40% to the company's total revenues, will soon emerge as the core business of the company. The company has strong pipeline of products to be marketed in the US. It has filed new drug applications for 153 drugs and has received 55 product approvals till March 2011. To build on its product pipeline, the company increasingly targets large value molecules that are either in short supply or are expiring in the near term or are difficult to manufacture. It also has a large number of branded generic product registrations in Africa, Australia and South East Asia.

   In the last couple of years, the company has made significant investments in the specialties segment. Its new plant in Bangalore, having received USFDA approval, has led to a five-fold increase in the company's capacity for supplying injectibles to the US. The company's acquisition of Inbiopro - a biotechnology company - marks its foray into biosimilars and immediate access to a pipeline of eight products. The company's pharma business is growing at a muted pace due to a conscious attempt by the management to avoid highvolume low-margin institutional business. Its loss-making front-end business in Brazil is likely to break even by the end of this year.

KEY FINANCIALS:

The company's net sales have grown at a CAGR of 26% during the last five fiscals. Its net profit has risen at a CAGR of 20.3% during the same period. The company being in a growth phase is not consistently paying dividends. Licensing agreements with the MNCs are resulting in a steadily increasing licence income. The company expects to earn a licensing income of 250-280 crore for the current year 2011. High debt and the resulting interest cost are a concern for the company. In the latest quarter ended March 2011, interest cost was 43 crore almost the same as the net profit figure of 45 crore.

   The company's debt equity stands at 1.5. With the FCCB due in June 2012, the management expects the debt equity ratio to come down below 1 in another one year. The 1,800-crore company expects to close CY11 at a revenue of 2,200 crore, an increase of 25% y-o-y with an average EBITDA margin of 21%. This guidance is not a difficult one for the company to achieve, given the recent product approvals, commercialisation of its licensed products and increased capacity in hand to cater to demand from the developed markets.

VALUATIONS:

The company is valued at 18 times its consolidated trailing 12-month earnings. It is valued at 1.25 times its total net sales of the last four quarters. These are fair valuations for a midsized pharma company which is all set to benefit from its expansion.