We believe that investors’ concerns over Strides Arcolab’s (SAL) residual business model post divestment of the injectables business to Mylan – are highly unwarranted. On the contrary, we believe SAL has built (and continues to build) strong capabilities (organic as well as inorganic) over the past few years to deliver a robust 50% earnings CAGR over FY15E-FY17E. In our view, SAL presents a right mix of robust growth, improved return ratios and a strong balance sheet, which not many peers offer currently. We believe Shasun’s merger with SAL is a great fit for the latter, which along with robust growth in the US and African business, is likely to propel its stock’s performance in the medium term and reduce the valuation gap with peers. We have assigned Buy rating to SAL with a target price of Rs1,136, valuing the stock at 18xFY17E EPS of Rs59.6 and added NPV (net present value) of Rs63/share for US$140mn of cash to be received.
We had retained BUY on Strides Arcolab in our call update dated November 28, 2014 for a target of Rs920. The stock has surpassed our target delivering a ~35% return in less than a month. We remain positive on the stock on the back of Sovaldi opportunity and advise clients to remain invested with revised 9-12mth target of Rs1,020.