Accumulate Strides Arcolabs - Dolat Capital

Topline marginally ahead of estimates; an operationally strong quarter Strides Arcolab's Q1CY12 revenue (including 24 days of Ascent Pharma sales) grew 7.3% YoY to Rs.5.34bn. However, the topline on a like-to-like basis grew 40% YoY to Rs.4.95bn. Licensing income for the quarter stood at Rs.640mn.

Highlight of this growth was healthy performance in the specialty division driven by new product launches and benefit of operating leverage. Core revenue from the division (ex licensing income) more than doubled to Rs.2.74bn with operating margins at 26%.

The company has acquired an FDA approved sterile formulations facility to effectively capitalize on the US drug shortage opportunity. Its existing capacities (including non-oncology) are already tied up.

The Pharma division's revenue on a like-to-like basis grew 37% YoY to Rs.1.58bn with its core operating margin (ex licensing income) at 19% for the quarter. Operating margin increased by 450bps YoY to 24.9% mainly due to lower other expenses (down 270bps YoY) and raw material costs (down 110bps YoY).

The exceptional items for the quarter include (a) forex loss of Rs.250mn, (b) loss of Rs.15mn related to fair value of options and (c) profit on sale of investments of Rs.6.32bn (mainly pertaining to Ascent sale).

Recurring PAT (adjusted for tax impact and excl. exceptional items) grew 126% YoY to Rs.608mn (Rs.269mn in Q1CY11).

At the same time, the management indicated of high growth potential in sterile business, to be aided by launch of 31 products this year and higher contribution from Penem exports from Brazilian facility. To reflect the benefit of operating leverage on commercialisation of these products, we have revised our earnings estimate upward by 4.7%/4.2% for CY12E/CY13E.

Source : Equity Bulls

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