Strides Arcolab – Buy On Dips

Bangalore based Pharma Company Strides Arcolab has posted 13% growth in the net profit. The company had sold its Australian business last year hence its numbers are strictly not comparable on the YOY basis.

Its total revenues stood at Rs 577 crore showing a sequential 14% jump in the top line. Company derives its revenues from two segments namely Agila Specialties and Pharma. Over past few quarters, Revenues from Agila have been showing decent growth and the same story has continued during this quarter as well. In the current quarter, revenues of Agila have shown a growth of 25% on YOY basis. The operating profits of Agila have shown even better growth of 47%. EBITDA margins stood at 36% compared to 30% in the corresponding period of last fiscal. The contribution of Agila’s EBITDA to total revenues was at whooping 81% indicating that Agila has been a main driver of the company. Management in the last quarter has said that going ahead the operating performance will be much better which has been reflected in the current quarter results.

Revenues from Pharma segment however have shown some underperformance. As the Australian business formed a part of Pharma business, we cannot compare the segment results on YOY basis, but on sequential basis the Pharma business has shown 14% decline. The EBITDA margins have declined by about 900 basis points to 14%. The subdued result of the Pharma segment is in line with the expectations and hence it is discounted by the market.

For this company however one should look at the Agila which is driving the revenues and margins of the company. Agila’s super performance has driven the total margins of the company to 25% from 19% in the September quarter of last fiscal and 23% in the June quarter of this fiscal.

The product approvals during the quarter were also strong. The quarter saw total 28 filings and 6 approvals in the US Market. It also monetized total 7 products in US taking total tally of monetized products to 50. Currently its pipeline shows total 232 flings and 102 final approvals. It has total 81 products available from commercialization of which 74 are form Specialty segment.

Company used the proceeds of the stake sale in Australian business to repay its debt. Its balance sheet now shows a net debt to equity ratio of 0.6x which is quite comfortable compared earlier level of over 1x.  After this reduction of the debt, its total interest expenses has also shown sequential as well as yearly decline which is positive on its net profit.

In the last quarter Agila acquired USFDA approved sterile facility of Star Drugs and Research Lab for Rs 125 crore. The shipments from this capacity will start in the next quarter hence one can expect good set of numbers in the next quarter.

We already have a price target of Rs 1000 on the scrip and at the CMP of Rs 895 it can still yield about 11% returns to the investors. Investors should buy this scrip on the dips for better returns.