Mar 04, 2013 05:11 PM IST | Source:

Accumulate Strides Arcolab; target Rs 917: Dolat Capital

Dolat Capital is bullish on Strides Arcolab and has recommended accumulate rating on the stock with a target price of Rs 917 in its March 04, 2013 research report.

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Dolat Capital is bullish on Strides Arcolab and has recommended accumulate rating on the stock with a target price of Rs 917 in its March 04, 2013 research report.

"Strides Arcolab's Q4CY12 revenue declined 7.9% YoY to Rs 6.33bn. However, the company registered topline growth of 40% YoY on a like-to-like basis (excluding Ascent Pharma). Licensing income for the quarter stood at Rs 710mn (Rs 1.69bn in Q4CY11). The specialty division's revenue grew 28% YoY to Rs 3.65bn. Its operating margins stood at 32% for the quarter. Importantly, topline grew over three fold in specialty division ex Brazilian operation at Rs 2.37bn, with EBITDA margin at 45%. Licensing income stood lower at Rs 580mn (lower by Rs 290mn as it bought back key products). Margins for the Specialty segment were pulled down by Brazil business which reported a loss at EBITDA level of Rs 90mn on account of ANVISA strike and exchange fluctuations.

Pharma division's revenue (excluding Ascent operations) grew by 60% YoY to Rs 2.84bn. Operating Margins stood at 10% for the quarter. Licensing income stood at `130mn (Rs 60mn – Q4CY11). This got impacted by Rs 190mn as it bought back Immunosuppressants (Tacrolimus & MMF) which it expects to launch by its own in Q2CY13E.

Operating margin on a like-to-like basis (excl. Ascent business) stood higher by 400bps YoY to 22% during the quarter. Tax rate stood lower at 21% compared to 37% in the same period last year. The exceptional items for the quarter includes forex gain of Rs 109mn (gain of Rs 506mn in Q4CY11). Reported PAT degrew 10%YoY to Rs 612mn. Adjusted PAT (after minority interest and excl. exceptional items) stood at Rs 540mn.

Valuations: The announced sale of Agila Specialty to Mylan comes at a time when US is grappling with drug shortages with global players like Hospira experiencing manufacturing compliance issues. This deal underpins Mylan's intent of being among the top three in global injectables platform and gives it entry in fast growing markets along with an enriching product pipeline. Notably, the global generic injectable industry is expected to grow at 13% over 2011-17E driven by patent expiries.

This deal equally stands beneficial for Strides and reflects a good value proposition for its high quality compliant assets (USD 400mn spent over five years). We shall revisit CY13E and CY14E estimates post successful closure of the deal (anticipated in September'13). At CMP, the stock trades at 15.8x CY13E and 12.3x CY14E earnings. We recommend accumulate on the stock with a revised target price of Rs 917 (13x CY14E earnings). However, on successful Agila specialty business deal closure and based on certain assumptions, we expect the fair value of the stock to be Rs 896," says Dolat Capital research report.

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