Friday, February 3, 2012

>STRIDES ACROLAB: Strides sold 94% holding in Ascent Pharma Health

Sale of generic pharma business at US$375mn
■ Event: Strides sold 94% holding in Ascent Pharma Health, its generic pharma operations in Australia and Southeast Asia, to Watson Pharma, in all cash transaction at an EV of AU$375mn (US$375mn for Strides 94% stake). Watson acquired the remaining 6% stake from the company’s CEO. Assets worth US$113mn are transferred to Watson as a part of this transaction.
 Rationale: The company would be utilizing the sale proceeds to fund future capital growth in the sterile injectable sector (major focus area comprising 44% of the total sales) along with reduction in debt, thereby improving its leverage position. Strides has chalked out a debt reduction program of US$250mn, which includes redemption of US$117mn (including YTM) FCCB due in June, 2012 and payment of US$50mn debt pertaining to Ascent.
 Agreement with Pfizer remains with Strides: Ascent had entered into a distribution and services agreement with Pfizer Australia to promote and sell the full range of Pfizer’s established off-patent medicines to Australian pharmacies. This remains intact with Strides. Under the agreement, Strides will promote and distribute Pfizer’s off-patent branded medicines to pharmacies via direct distribution channel as well as sell a number of Pfizer’s branded generics. Pfizer has around 100 drugs in Australia. We expect this deal to significantly boost the overall revenues of Strides.
 Impact: The deal is valued at EV/sales of 2.6x and EV/EBITDA of 19.7x with a sale of US$160mn in CY2011E and EBITDA of US$21mn. It will improve the leverage as the debt reduces from current US$525mn to US$275mn. Currently Strides has a D/E ratio of 1.6x (including FCCB). Post the deal, the D/E ratio is likely to reduce to 1.0x thereby, strengthening the balance sheet. This would reduce the interest costs by ~US$15-20mn for CY2012, thereby, increasing profitability. Besides, the goodwill from the books would also be reduced by ~US$50-60mn.

Outlook and Valuation
Strides has emerged leaner and stronger post restructuring its business with a clear focus on niche specialized segments. The deal emphasizes Strides’ priority to optimize the shareholder value by focusing on return ratios, targeting better working capital management and reducing debt level. With the complete focus on high margin sterile business, potential new launches, abundant capacity available, cash for upgradation of sterile facilities, we believe the company is expected to witness a sharp upswing in earnings and is poised for re-rating. We revise our estimates factoring the sale of the Australian business and anticipate a 10% CAGR growth in revenues and 32% CAGR in earnings with an improving EBITDA margin for CY2010-13E. Since our price target of Rs485 was achieved (refer our report: “Taking Big Strides” on 1st Dec 2011), post this deal, we recommend Buy on the company with an upgraded price target of Rs650.

To read the full report: STRIDES ACROLAB