Stock Pick From The Pharmaceutical Sector

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as the Choice Scrip for this issue is a leading pharmaceutical company.

Strides Arcolab - Growth Spurt

HERE IS WHY:

• SAL is targeting growth in foreign markets, which allows it to chart a higher growth trajectory.
• The company has a very strong product pipeline.
• The specialties segment has high EBITDA margins and is the key revenue driver.
• After divesting its Australian business, it has reduced its debt, and hence, the profit margins will improve.

Companies with superior product portfolios are always in demand, not just as far as their products are concerned but also as far as their stock trading on the bourses go, where investors remain bullish on such companies. We had analysed Strides Arcolab (SAL) in DSIJ Vol. 27, Issue No. 11 (dated 20th May, 2012). Since our analysis till date, the scrip is up six per cent. On a YTD basis, it is up by 81 per cent, and we believe that there is much more on offer than what has come in until now in terms of returns.

SAL is a Bengaluru-based pharma company founded in 1990 and listed on the bourses in the year 2000. It has a presence in more than 75 countries through a total of 14 manufacturing facilities across the globe. The growth of the company is supported by its joint ventures and acquisitions. One of the striking differences in its business is that SAL derives just four per cent revenues from the domestic market, which is quite less as compared to other pharma companies.

SAL’s strategy of targeting growth in foreign markets is allowing it to chart a higher growth trajectory. Due to this strategy, the company has seen its revenues rise at a five-year CAGR of 27 per cent, while its net profit has risen by 36 per cent. The EBITDA margins have also increased from 17 per cent in 2006 to 26 per cent in 2011 (the company follows the calendar year as its financial year). SAL has two business segments, viz. pharmaceuticals and sterile products (called Agila). Agila brings in 54 per cent of its revenues, while the pharma business adds the remaining 46 per cent. Agila’s contribution to the company’s topline has been increasing due to its high growth rate. This segment has seen a five-year CAGR of 65 per cent. The pharma business is also growing at a healthy rate of 28 per cent.

Due to the nature of the products that it sells, Agila will be the future growth driver of the company. It has products in therapeutic segments like oncology, ophthalmics, penicillins, etc. Mostly sterile in category, these products are in constant shortage of supply, and hence, the company will see no demand constraints. We also the expect demand for these products to rise because they are complex to manufacture, and thus command high margins. This is also evident from the fact that the business has a higher EBITDA margin of 26 per cent as compared to the 16 per cent margin that the company enjoys in the pharma business. Due to the higher margins, Agila contributes 59 per cent of SAL’s EBITDA, and this is only expected to rise going ahead.

The company sold off its Australian pharma business for USD 390 million (`2000 crore) in 2011. This cash was used to repay its FCCBs, due to which its debt-to-equity ratio has improved to 0.36x as of June 2012. A part of this cash has also been used to purchase a USFDA-approved sterile formulations facility in Tamil Nadu, which will most likely be commissioned by this year.

On the financial front, the company reported an eight per cent decline in revenues to `550 crore. This was due to the sale of its Australian business. The net profit, however, was up by 31 per cent at `90 crore. On the valuations front, it is available at an EV/EBITDA of 8.6x, which is mostly in line with that of Biocon (7.7x), its competitor by market cap. Biocon, however, has seen a 10 per cent decline in its share price. SAL also has a total of 75 products available for commercialisation as well as 204 filings in the US. On the back of all these factors, we advise investors to buy SAL for better returns.

LAST FIVE QUARTERS (Rs/Cr)