>STRIDES ARCOLAB: Focus on specialty segment to drive 25% revenue CAGR

We met Mr Arun Kumar, Executive Vice Chariman and CEO of Strides Arcolab (STR), who shared his views on the company's long term strategy, growth prospects, and challenges among other things.

Specialty business to be the key long term growth driver

⇒ STR's business focus is on the specialty segment as its key long-term value creator and growth driver. STR has developed one of the most competitive sterile product franchises globally with eight manufacturing facilities.

⇒ The company is looking to divest the pharma business, (non-sterile business) if it gets the right price. The pharma business comprises institutional business related to antimalaria, anti-TB remedies and branded generic business in India, Australasia and Africa, contributing ~INR12b to STR's annual revenue.

Partnership with MNCs leverages strong product pipeline

⇒ We feels that STR's partnership with Pfizer in various regulated markets and with GSK for 95 emerging markets has enabled Strides to leverage strong and best in class distribution of these MNCs across the globe.

⇒ Partnership with Pfizer, particularly the US, gives it a strong competitive advantage. STR expects to corner 15-25% market share in the US, backed by Pfizer's strong marketing and distribution, and low competition.

STR slated to post revenue CAGR of 25% over the medium term

⇒ STR's has raised its CY11 revenue guidance to INR25b from INR22b and is slated to grow overall revenue by 25% CAGR in the medium term. The product portfolio of the company targets USD11b market opportunity.

⇒ Further, given the strong product pipeline which includes High Potency drugs, Penems, Cephalosporins, Ophthalmic and Peptides, the company is likely maintain robust licensing income of INR2.5b every year over the next few years.

Profitability to increase as capacity utilization ramps up

⇒ The management guidance is for significant improvement in profitability, led by a scale-up in manufacturing.

⇒ STR expects EBITDA margins, RoCE and RoE to improve substantially over the medium term and believes profitability was depressed in the past due to large investments in building the specialty business.

Valuation and view

⇒ STR is set to emerge as a specialty company with revenue contribution from the segment rising from 28% in CY09 to 51% in CY12. STR has an impressive product pipeline in the specialty segment.

⇒ We expect STR to post earnings CAGR of 36% over CY10-12. At CMP of INR406, the stock trades at 10.8x CY11E and 10.4x CY12E earnings. Maintain Buy with a target price of INR509 (13x CY12E EPS), an upside of 25%.

To read the full report: STRIDES ARCOLAB