Strides Arcolab’s second innings, post the divestment of Agila steriles business to Mylan in 2013, has been catalyzed by its two proposed transactions...
Strides Arcolab’s second innings, post the divestment of Agila steriles business to Mylan in 2013, has been catalyzed by its two proposed transactions – the Shasun merger and an opportunistic acquisition of Aspen’s Australian generics (Arrow).
The transactions create a strong platform for sustained medium-term growth. We expect the ~$200m formulations-focused Strides to transform into a geographically diversified and vertically integrated $700m entity by FY17 without over-reliance on US generics (unlike most peers). With 135% CAGR in consolidated PAT (excluding one-offs) over FY15-17E and a reasonably healthy balance sheet (~2x Net Debt/ EBITDA), the stock is a re-rating candidate. At 16.5x FY17E proforma earnings, we maintain Outperformer on Strides with a price target of 1,577. Post Shasun/ Arrow consolidation, Strides would have multiple growth drivers comprising the US, Australia and EU generics, branded formulations across Africa and India, institutional supplies (HIV / Malaria) and CRAMS/ APIs. Except Australia and API, all other segments are scaling up on a low base and we expect 15-20% CAGR across businesses over FY15-17E.
Shasun merger (expected to close by 3QFY16) is set to transform Strides’ formulations-only business model as it adds significant FDA-approved manufacturing (API as well as formulations) capacities and makes it a vertically integrated player.