Accumulate Strides Arcolab; target 935: Dolat Capital

Dolat Capital is bullish on Strides Arcolab and has recommended buy rating on the stock with a target of Rs 935 in its October 22, 2012 research report.

“Strides Arcolab’s Q3CY12 revenue declined 23% YoY to ` 5.96bn. On a like-tolike basis (ex Ascent Pharma), topline grew 12% YoY. Licensing income for the quarter stood at ` 1.15bn (` 1.72mn in Q3CY11). Specialty division’s revenue grew 28% YoY to ` 3.71bn with EBITDAM at 36%. Topline growth ex Brazilian operation was 66% YoY. Licensing income stood at ` 990mn, 73% of which accrued to EBITDA.Margins were constrained by Brazil business which saw (1) delay in USFDA approvals of Penems and (2) ANVISA strike.”

“Pharma division’s revenue declined 53% YoY to Rs 2.29bn with EBITDA margin at 14%. Ex licensing income and Ascent Pharma, topline grew 15% YoY. Licensing income stood at Rs 160mn, 6% of which percolated to EBITDA. Margins in this segment were impacted by (1) step-up in competition in the gVancomycin market and (2) delayed approvals. Consolidated EBITDA margin increased by 610bps YoY to 25% mainly due to lower raw material cost (down 850bps YoY). Operating margin on a like-to-like basis (excl. Ascent business) declined 230bps YoY from 27.3% in Q3CY11. PBT (excl. extra ordinary items) stood flat YoY at Rs 811mn. However, growth excluding Ascent Pharma last quarter was 55% YoY.”

“Strides Arcolab stands to benefit from the current drug shortages in the US as global players like Hospira experience manufacturing compliance issues. We expect 36% adjusted earnings growth over CY11-13E. Increased contribution from steriles, sustained profitability in the pharma division and low debt gearing aids earnings growth. At CMP, the stock trades at 20.6x CY12E and 16.3x CY13E earnings. We recommend accumulate on the stock with a revised target price of Rs 935 (17x CY13E earnings),” says Dolat Capital research report.

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