Strides Arcolab to offload pharma business

According to reports published by Mint (December 13) and a research note by Motilal Oswal Securities Limited dated November 21, Strides Arcolab is planning to divest a major part of its business. The initial details are not available and the management has strongly declined to comment on this issue. The company has been in a restructuring mode for the last two years and has changed its business mix from pharmaceuticals to specialties.

Strides Arcolab is an export-oriented pharma company headquartered in Bangalore. It has two business verticals viz. pharma and specialties. The pharma business contributes about 61 per cent while specialties contribute about 39 per cent in its total revenues. For the calendar year 2010 the company derived 97 per cent of its revenues from exports. As per the news stories in Mint, the company wishes to sell its pharma business for a realization of Rs 5,200 crore and talks are already going on.

Its specialty business has been a key long-term growth driver for the company. In this segment its revenues grew by 85 per cent to Rs 690 crore in CY10. The margins also improved by a whopping 700 basis points to 32 per cent and its operating profit increased by 143 per cent to Rs 224 crore during the same period. In the pharma business its growth has been moderate and its revenues increased by 13 per cent to Rs 1,075 crore in CY10. The company’s EBITDA margins stood at 16 per cent during the same period. The most notable was the EBITDA level contribution of its specialty business, which increased from 44 per cent to 57 per cent in CY10 on a YoY basis. This indicates that the growth opportunity for this particular segment will be very strong in the future.

Its specialty business operates through its subsidiary Agila Specialties. Currently the company has six US FDA approvals in the oncology segment through this subsidiary. Besides, its oncology and sterile injectable facility has received US FDA approval this year. It also has European approval for its onconlogy products. Once this deal is materialised the company will witness decline in its topline to the tune of about 60 per cent. On the EBITDA level, however, the impact will be less as the company has witnessed very strong momentum in the specialty business. Also, Strides has also received 11 injection approvals in this calendar year.

The realisation from the divestment of its pharma business (Rs 5,200 crore) will be more than double its current market cap of Rs 2,455 crore, which, we believe, will increase its cash position. In our opinion this will be a good deal for the company which will enable it to focus on the high growth business of specialties. In the current market situation, we believe the speculations will be high and hence it would be more practical to wait until the company announces something concrete on this front.