[T.S.R:18301] Strides-BUY With A Target of Rs 650

Event:

Strides sold 94% holding in Ascent Pharma Health, its generic pharma

operations in Australia and Southeast Asia, to Watson Pharma, in all cash

transaction at an EV of AU$375mn (US$375mn for Strides 94% stake). Watson

acquired the remaining 6% stake from the company's CEO. Assets worth

US$113mn are transferred to Watson as a part of this transaction.



Rationale: The company would be utilizing the sale proceeds to fund future capital

growth in the sterile injectable sector (major focus area comprising 44% of the

total sales) along with reduction in debt, thereby improving its leverage position.

Strides has chalked out a debt reduction program of US$250mn, which includes

redemption of US$117mn (including YTM) FCCB due in June, 2012 and payment

of US$50mn debt pertaining to Ascent.



Agreement with Pfizer remains with Strides: Ascent had entered into a distribution

and services agreement with Pfizer Australia to promote and sell the full range of

Pfizer's established off-patent medicines to Australian pharmacies. This remains

intact with Strides. Under the agreement, Strides will promote and distribute

Pfizer's off-patent branded medicines to pharmacies via direct distribution channel

as well as sell a number of Pfizer's branded generics. Pfizer has around 100 drugs

in Australia. We expect this deal to significantly boost the overall revenues of

Strides.



Impact: The deal is valued at EV/sales of 2.6x and EV/EBITDA of 19.7x with a sale

of US$160mn in CY2011E and EBITDA of US$21mn. It will improve the leverage

as the debt reduces from current US$525mn to US$275mn. Currently Strides has

a D/E ratio of 1.6x (including FCCB). Post the deal, the D/E ratio is likely to reduce

to 1.0x thereby, strengthening the balance sheet. This would reduce the interest

costs by ~US$15-20mn for CY2012, thereby, increasing profitability. Besides, the

goodwill from the books would also be reduced by ~US$50-60mn.

Outlook and Valuation

Strides has emerged leaner and stronger post restructuring its business with a clear

focus on niche specialized segments. The deal emphasizes Strides' priority to

optimize the shareholder value by focusing on return ratios, targeting better working

capital management and reducing debt level. With the complete focus on high margin

sterile business, potential new launches, abundant capacity available, cash for

upgradation of sterile facilities, we believe the company is expected to witness a sharp

upswing in earnings and is poised for re-rating. We revise our estimates factoring the

sale of the Australian business and anticipate a 10% CAGR growth in revenues and

32% CAGR in earnings with an improving EBITDA margin for CY2010-13E.

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