Strides Arcolab’s Net Profit Zooms To Rs 68 Crore

Strides Arcolab has reported a good set of results in the recently completed Dec 2011 quarter on the back of growth in its 2 main businesses – specialties and pharma. During the quarter, the company reported a 51% rise in its sales to Rs 686 crore on a YoY basis. Its net profit zoomed several fold to Rs 68 crore mainly due to the high quantum of foreign exchange gains amounting to Rs 59 crore.

Though the company has reported handsome numbers, its performance has remained subdued on an operating level, where its EBITDA margins shrunk by 309 bps on a YoY basis. Increased input costs such as those for raw materials (85% increase) and other expenses (81% increase) have resulted in the contraction of EBITDA margins.

Among the other expenses, interest expenses increased by 12% to Rs 50 crore, while tax expenses decreased by 23% to Rs 14 crore. Forex gains remained in excess of Rs 59 crore, as the company has received some of the money from the planned divestment that we had reported in Dec 2011. On the back of this, it reported a net profit of Rs 68 crore, which is almost 30 times higher than the profit of Rs 2.2 crore that it reported in Dec 2010.

Strides Arcolab has a financial reporting year from Jan-Dec. For the year 2011, the company reported decent numbers, where its topline appreciated by 46% and the bottomline increased by 83%. During the year, the company received a licensing income of USD 112 million (Rs 520 crore). It reported 48% and 44% growth in the specialties and pharma businesses respectively. While the margins in the specialties business declined, they remained stable in the pharma business. Overall, its EBITDA margins have slipped by more than 200 bps.

The company has been undergoing the restructuring of its business. As a part of this move, it has sold its Australian subsidiary, Ascent Pharma, to Watson Pharmaceuticals for AUD 375 million (Rs 2000 crore). We believe that the company has completed this divestment at a high profit, as the original acquisition of 50.1% stake was completed in 2008 at a price of about AUD 35 million. In our last Mindshare article, we had said that the cash generated through this transaction will be used to pay some of its debt (Rs 2566 crore), and hence, its overall ratios will further improve. As per a recent conference call, the company has repaid Rs 250 of its existing debt.

Going forward, Strides Arcolab expects to monetise major products from its pipeline, which will increase its licensing income. Currently, 36 products have been commercialised and about 25 are expected to be monetised soon.

The company is also developing a capacity in Brazil, which is expected to go live by the Jun 2012 quarter. Overall, the Brazilian market has shown a double digit growth rate, and hence we believe that its revenues would get an uptick this year. Stride’s joint venture with Sagent in the US will consolidate its position this year, which will also be a topline boost.

The USFDA approvals were also on the rise in the year. During the Dec 2011 quarter, 2 capacities in Bangalore were approved by the USFDA. With this, the company’s total USFDA-approved capacities have gone up to 7, of which 6 are in the injectables segment and 1 is in the oral segment. By the end of 2011, the company had 183 total USFDA filings, of which 84 are approved and 21 have received tentative approvals.

Looking at its robust product portfolio, we believe that high growth drivers are in place for the company. Besides, one should note that most of its products are in the injectables segment, in which greater opportunities lie ahead.

At the CMP of 527, its scrip is trading at a PE of 13.6x to its 2011 EPS of 38.65. We have already recommended this scrip in our Mindshare article. The scrip is up 33% year to date, and we still believe there is good scope of investment in this scrip.