Strides Arcolab - Strong Product Pipeline to Benefit- Reiterate Buy

A Bangalore-based pharmaceutical company, Strides Arcolab currently looks well in terms of its business. As per an interview of Arun Kumar, CEO of Strides Arcolab, published in a leading newspaper, the company is looking to boost its domestic business. It has a low presence in India and by organic means it is now planning to increase its domestic earnings.

Kumar has also made it clear that Strides Arcolab would gain from the current shortages of sterile products in the U.S. market. The company has a strong pipeline of sterile products and has also expanded the capacity recently by acquiring a sterile formulation capacity in India. The product shortages are mainly due to the complex manufacturing process as well as for the fact that it is difficult for the existing players to fund capital expansions.

With its presence in the emerging as well regulated markets, the company hopes to see its growth rate remain at 30 per cent in the near future and that too despite its base becoming stronger year by year. The company has a strong R&D pipeline and its facilities are booked for the next two years, thus providing a very strong revenue visibility. Besides, it has already carried out its capex and hence there will be a good operating leverage, implying that the facilities will generate more revenues in the future without much money being invested in these capacities.

The company has also started a biotech business which is mainly focused on the potential in emerging countries. This is again in the injectable space in which it has better margins and has an advantage due to its existing business portfolio. Strides Arcolab is also in the process of launching generic injectable drugs in Canada in collaboration with Jamp Pharma. Through this venture it will launch 40 products in the next four years that will help it to get a share of the Canadian generic pharma space.

We are still positive on this company which has yielded nearly 90 per cent returns in this year so far. The company has recently redeemed USD 80 million FCCBs which have lowered its debt-to-equity ratio to 0.75. This will improve its net profit margins going ahead which will also be a positive trigger for the stock. We have provided a detailed analysis of Strides Arcolab in our magazine ‘Dalal Street Investment Journal’ with a ‘buy’ call on it. The stock is up by 16 per cent since our recommendation. Besides, from our ‘buy’ recommendation in December 2011 through our Mindshare column, the stock has yielded three-digit returns. We foresee an upside in the stock and investors would do well to buy on every dip with target price of Rs 850.