Strides Arcolab May Sell Domestic Generics Business

Economic Times has reported that Strides Arcolab is in talks to sell its India generics business to Zydus Cadila. The newspaper has quoted Strides’s CEO Arun Kumar denying any such development but we at DSIJ believe that there looks possibility of the same. Our opinion is based on the rationale that in January Company sold its Australian subsidiary Ascent Pharma to Watson Pharma for USD 390 million (nearly Rs 2000 crore). Besides company wishes to focus more on the specialty products such as oncology or injectables and hence offloading of the Indian operations can be a possibility.

Strides has two businesses in the domestic operations i.e. ‘Grandix’ and ‘Ray of Life’. The Grandix has presence in 5 South Indian states and it covers therapeutic segments such as diabetes, cardiovascular diseases, neurology and female healthcare. The other business, Ray of Life covers products in critical care segment i.e. oncology. At the moment Indian business adds 4% in the top line, at that level we believe that the contribution in the EBITDA and Net profit would be nearly negligible and hence we see no impact even if if sells the Indian generics business. The same impact was seen when company sold its Australian Business which contributed nearly 32% in the top line and about 18-20% in the EBIDTA. Company has good growth rates in the specialty segment which has taken care of the loss of the revenues due to offloading the Australian Business.

In the last year company has reported an impressive 34% growth in the domestic business. Company has not reported separately its EBITDA margins however we believe it would be in the range of 15-16%. On EV/EBITDA multiple of 10x, the domestic business gets valued at Rs 96 crore which looks like a fair value to the business. Company has been able to sell the Australian business at a good price and hence we may see even better valuation of the business.

As for investors the scrip still has lot more to offer as company expects to monetize most of its products. Beside with the production capacities booked for next 2-5 years the earnings would come lot better in the coming quarters.