Strides Arcolab: Taking long strides – BUY Report By IIFL

Strides Arcolab: Taking long strides – BUY Report By IIFL
CMP Rs1,180, Target Rs1,500, Upside 27.1%

In its second coming, Strides Arcolab is well on its way to rebuilding robust scalable operations across key geographies after successful monetization of injectables business. The company has moved up the value chain in emerging and regulated markets (31% of FY16E revenues) through creation of owned front end and localized manufacturing facilities (in Africa). US business is focused on niche high margin opportunities (like Methoxsalen) and recent large approvals like Tacrolimus and Combivir. Impending merger with Shasun would provide much needed backward integration in API supplies across segments. We expect institutional business (15% of FY16E sales) to ramp up growth on back of traction in anti malaria and larger demand opportunities supported by Shasun’s API portfolio. Strides has reentered Australian market through the A$380mn acquisition of Aspen’s generic assets which had sales of A$120mn and EBIDTA margin of 31%. We have ! factored in FY17E as the first full year of consolidation and expect ~80% revenue cagr over FY15-17E driven by 20% organic growth and rest from Shasun, Arrow consolidation. Margins would ramp up ~300bps as higher margin Arrow business would account for ~17% of FY17E revenues accompanied by sharp jump in RoE/RoCE. We ascribe ~21x PE to FY17E earnings to arrive at core business valuation of Rs1,397 and add Rs65 and Rs37 per share for escrow account payouts and value of stake in biopharma subsidiary respectively. Rate Strides as our top pharma pick and recommend BUY for 9-12mth target of Rs1,500.