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.