>STRIDES ACROLAB: Sold its Ascent Pharma business to Watson

Q4CY11 results beat estimates, healthy performance despite lower contribution from sterile business
■ Strides Arcolabs’ (STAR) topline grew 50% YoY to ` 6.98bn, led by higher than- expected revenue contribution from the pharma division at ` 4.08bn (up 63.8% YoY).


■ Revenue from specialty business saw a slight moderation in growth during the quarter at ` 2.73bn (up 23.6% YoY) restrained by subdued performance in Brazil, where the company shifted its marketing strategy from distributor channels to its own front-ended model. Licensing income for the quarter stood at ` 1.7bn (Q4CY10: ` 973mn).


■ Growth in pharma business was driven by higher-than-expected contribution from HIV segment and high growth in Indian brands. African business also witnessed stable growth amidst civil and political unrest.


■ EBITDA margins stood lower by 310bps YoY at 15.6% due to higher other expenses (up 440bps YoY at 25.2% of sales) which included one-off loss of ` 310mn on Brazilian front-ended operations. Adjusted for that, EBITDA margins stood 20%.


■ STAR recorded net MTM gain of ` 602mn (includes ` 800mn gain on restatement of assets in Ascent Pharma). PAT after minority interest and excluding extraordinary items grew 85.9% YoY to ` 102mn.


■ The management has deferred its guidance for CY12E for the time being due to uncertainity over timely regulatory approvals and outcome of patent litigations. However, they indicated of high growth potential in sterile business, mainly aided by launch of 36 products this year and higher contribution from recently FDA approved Penem facility in Brazil.



Q4CY11 Result
■ Revenue grew 50% YoY to ` 6.98bn, mainly driven by higher-than-expected revenue contribution from pharma business at ` 4.08bn (up 63.8% YoY). EBITDA margin for pharma business stood at 11%.


■ Specialty business saw a slight moderation in growth at ` 2.73bn (up 23.6 YoY). EBITDA margins stood at 28%. Licensing income for the quarter grew 74.6% YoY to ` 1.7bn.


■ Consolidated EBITDA margins shrunk 310bps to 15.6%, deterred by higher other expenses at 25.2% of sales (up 440bps) which included one-time loss of `310mn on Brazilian operations. Raw material costs too increased to 47.6% of sales (up 90bps YoY) while employee costs declined to 11.6% of sales (down
220bps YoY).


■ During the quarter, interest cost grew 12.4% YoY to ` 507mn while depreciation increased by 70.2% YoY to ` 298mn. PBT excluding extraordinary items stood at ` 285mn (down 1.5% YoY).


■ Extraordinary items (EOI) for the quarter include MTM gain of ` 602mn on net foreign assets, of which ` 800mn was on restatement of assets in Ascent Pharma. The company also recorded loss on sale of investments of ` 20mn.


■ PAT, after minority interest and excluding EOI, grew 85.9% YoY to ` 102mn.



Pharma division
■ The company sold its Ascent Pharma business to Watson for AUD 375mn. Ascent Pharma had recorded total sales of ` 8.3bn for CY11 along with an EBITDA of ` 1.05bn. The transaction has been completed as of 24th January 2012. The company will receive USD 265mn from the sale (post tax and after AUD 50mn of debt repayment relating to Ascent). The rest of the proceeds will be utilized towards debt reduction - includes FCCB redemption of USD 116mn (including premium).
■ The company’s flagship brand Renerve generates sales of ` 340mn and grew 45% YoY.


Financials
■ Gross debt position as of Feb-12 stands at ` 22.5bn (Dec-11: ` 25.6bn; Dec-10: ` 20.1bn). Net-debt/equity ratio pulled down to 0.7x as of Feb-12.
■ Cash in books stands at ` 10.5bn as of Feb-12 (Dec-11: ` 2.6bn; Dec-10: `3.4bn).
■ The company clarified that gross block (incl. WIP) of ` 13bn, as of Dec-11, includes only ` 200mn pertaining to Ascent Pharma. This figure will increase by ` 1bn – 1.5bn as additional capex is incurred.
■ Goodwill on books stands at ` 19bn as of Dec-11 and will be reduced by ` 3bn – 4bn after the Ascent Pharma sale.
■ Capex guidance for CY12E stands at USD 15mn.
■ The management has deferred its guidance for CY12E for the time being due to uncertainity over timely regulatory approvals and outcome of patent litigations.



Valuations
STAR stands to benefit from the current drug shortages in the US as global players like Hospira experience manufacturing compliance issues. FDA approval to its Bangalore sterile and oncology facilities allows it to move the approved products (25 of them in CY12E) towards commercialisation.


We expect 17% earnings growth over CY11-13E. Increased contribution from sterile segment, turnaround in front-ended Brazilian operations will lead to margin expansion. The divestment of Ascent Pharma business has strengthened its Balance Sheet (Net Debt/Equity - 0.7x) while also its capex cycle is nearing an end. This shall result in higher return ratios going forward. At CMP of ` 533, the stock trades at 11.8xCY12E and 10.1xCY13E earnings. We recommend Accumulate on the stock with a revised target price of ` 583 (11x CY13E earnings).
RISH TRADER