Buy Strides Arcolab; target of Rs 900: Religare Capital

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26 Aug, 2025 12:21

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Religare Capital`s research report on Strides Arcolab Revenue growth to be led by US, Africa: We expect STR to post a 21% revenue CAGR over FY15-FY17 as (a) pharma generics (37% of sales) grow at 29% on the back of niche US filings (63% CAGR), (b) branded generics (24% of sales) grow at 25% driven by scale-up in Africa post capacity additions, and (c) the institutional business (39% of sales) posts steady growth, with an improved mix on entry into anti-malarials. Improving business mix to aid margin expansion: We forecast an EBITDA CAGR of 25% (FY15-FY17) with 125bps cumulative margin expansion by FY17 to 20.3%, reflecting upside from niche US launches (Prograf, Combivir, Soft-gel products) and an improved product mix in branded markets (chronic focus in Africa/India). Payout of surplus cash from Agila deal provides valuation cushion: STR is likely to receive US$ 250mn from Mylan this month upon completion of a year since the USFDA warning letter on its divested plant. A further amount in escrow (US$ 100mn) and tax contingency (US$ 40mn) is receivable over the next four years; adjusting for some spend (20%), the amount would be distributable to shareholders, per management. Valuation gap to narrow: STR is trading at 11.3x one-year fwd P/E (ex-cash receivable), a 25% discount to mid-sized peers – this should narrow given a strong balance sheet (net cash) and rising return ratios amid a robust business outlook. We value the base business at Rs 650 (16x Sep’16 EPS) & cash at Rs 250 to arrive at our TP of Rs 900. BUY.

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