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The sharp run-up in the price (117 per cent year-to-date) and rich valuations may limit the upside in the stock of Strides Arcolab, leading injectable player, over a one-two year time frame. The stock is up 35 per cent since our last buy recommendation in April. Investors can consider booking profits in the stock.
At the current market price of Rs 892, all the positives appear to be priced in at 16.2 times CY13 earnings.
The stock trades at a 33 per cent premium to the US-based Hospira Inc, global leader in the injectables space.
Strides’ business comprises two major segments — specialty and pharma. Agila, the company’s specialty segment, accounts for almost two-thirds of the total revenues.
Key products include sterile injectables in the antibiotics segment such as cephalosporins, penems and penicillins, in addition to high potency oncology drugs and controlled substances.
Strides has a joint venture with the US-based Sagent Pharmaceuticals for co-development and marketing of sterile injectables in the US.
The company also has partnership agreements with global pharma majors such as GlaxoSmithKline,
Pfizer and Sandoz, to market sterile injectables in the developed and emerging markets.
For the period January-September 2012, the specialty segment accounted for 61 per cent of the company’s revenues and 72 per cent of its operating profits.
Lower licensing income
Of the total revenues of Rs 1,000 crore, operational revenues (excluding licensing income) stood at Rs 782 crore, growth of 62 per cent over the same period last year. Licensing income from partners constituted the balance.
This provided a boost to the segment’s margins which stood at 33 per cent. Licensing income, with margins of 65 per cent, accounted for 43 per cent of the segment’s operating profit of Rs 330 crore. The margins on the operational revenues (excluding licensing income) stood at 24 per cent.
Despite a healthy pipeline of 74 specialty products currently available for commercialisation, the peak revenues from these new products may accrue only over a period of two-three years.
Further, the management has guided for a lower licensing income in CY13. Though this may improve the quality of earnings, the segment’s operating margins may witness pressure. But this may be partially mitigated by ramp up in revenues after launch of penem products in the US and Brazil.
INCREASED competition
Shortage of sterile injectables in the US also helped Agila’s revenue growth in the current year.
To address the drug shortage issue, the US FDA has passed orders which include expediting regulatory reviews.
This may mean faster approval of manufacturing facilities and filings for existing and new players, which can translate into additional competition for players such as Agila.
Rupee depreciation also lent a helping hand to Agila’s revenue growth in CY12. If the trend reverses, revenue growth may be impeded.
Steady pharma business
The pharma business comprises branded and generic products marketed in India, emerging and developed markets. This encompasses oral products across various therapy segments such as anti-retirovirals, anti-tuberculosis, immunosuppressants and nutraceuticals. Strides has partnered with global majors such as Aspen, Johnson and Johnson, Novartis and Pfizer to market these drugs in various markets.
This segment accounted for 39 per cent and 28 per cent of the total revenues and operating profits respectively for the period January-September 2012. The operating profit margins for this segment stood at 19.6 per cent.
In January 2012, Strides divested its stake in Ascent Pharmahealth, its generic business in Australia and South-East Asia, to the US-based pharma major Watson.
Strides received a total consideration of Australian dollar 375 million (Rs 1,900 crore) as part of the deal.
Out of the sale proceeds, $250 million (Rs 1,325 crore) may be used to retire debt and the balance to fund Agila’s capex.
Strides repaid Rs 304 crore of long-term borrowings between December 2011 and June 2012.
Yet, the interest outgo for the latest September quarter saw a marginal decline of 7 per cent compared to the same period last year, thanks to the tight interest rates.
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