Strides Arcolab poised for upgrade as rupee drops

The rupee’s biggest drop in 20 years is a stroke of luck for investors in Indian drugmaker Strides Arcolab Ltd.
Strides, which is selling its injectables unit Agila Specialties to Mylan Inc. for $1.6 billion, has pledged to distribute as much as 50% of the proceeds to shareholders. Analysts from Fortune Equity Brokers Ltd to IDFC Securities Ltd are poised to upgrade their forecasts for the stock as the more than 20% fall in the currency since the transaction was announced boosts the value of the deal.

The rupee’s depreciation means dividends for investors including Reliance Mutual Fund, India’s second-largest money manager, and Strides founder Arun Kumar may increase by Rs.1,070 crore ($157 million), according to data compiled by Bloomberg. Strides surged to a six-month high on 29 August, a day after the currency plunged to an unprecedented low.
“They’ve been very lucky with their timing,” said Hitesh Mahida, a Mumbai-based analyst at Fortune Equity Brokers. “I don’t think anybody expected this kind of currency devaluation.”

Strides has risen 28% in the past month making it the best performing stock on the 17-company S&P BSE India Healthcare Index after Ranbaxy Laboratories Ltd. The shares gained 0.3% to Rs.890.25 in Mumbai on Tuesday as the benchmark S&P BSE Sensex plunged 3.5%
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Price forecast

Mahida set his target price for the stock at Rs.1,333 should the deal happen when the rupee is at 67 to a dollar. Macquarie Securities Ltd analyst Abhishek Singhal estimates the share may exceed his price estimate by as much as 15% with the rupee at 65 per dollar.

The currency plunged to a record low of 68.8450 per dollar on 28 August. UBS AG says a drop to 70 is possible. One-month onshore forwards traded at 68.31, while the rupee declined 2.6% to 67.73 in the spot market on Tuesday.
They are a big gainer from the rupee, because they have not hedged their proceeds from the divestment, said Nitin Agarwal, an analyst with IDFC Securities Ltd. A large chunk of the target price would depend on the transaction and the price they realize.

“The company didn’t hedge the proceeds because rules require it to seek regulatory approval for the sale transaction before it can insure against adverse foreign-exchange movements,” Group chief financial officer T.S. Rangan said on a call with analysts on 25 July.
Government approval
Strides won cabinet approval for the deal on Tuesday.
The company estimates it will get the payment by the first half of October, Group chief executive officer Kumar said in a call with analysts on 25 July. Strides will receive an additional $250 million from Mylan four to six months later, after it invests another $125 million in the subsidiary.

“As much as $800 million of the payment will be distributed to Strides shareholders either through a share buyback or dividends,” Kumar said in February. Founders including Kumar own about 27% of Strides. Billionaire Anil Ambani’s Reliance Growth Fund owns about 3%, while SBI Funds Management Pvt., controls 1% of the company, according to data on the BSE India website.
Kumar along with K.R. Ravishankar started the generic drugmaker in 1990. The Bangalore-based company became a supplier of off-patent sterile injectable and oral products to Pfizer Inc. in 2010.

Biosimilar drugs

“Strides will also pay as much as $300 million in taxes,” Kumar said. The company will use $400 million of the funds to repay all its debt, employees and minority partners. Another $100 million will be invested into its remaining pharma and biotech business, including the development of biosimilar drugs, which are low-cost versions of treatments made from living organisms.
“It’s difficult to predict whether they’ll succeed in biosimilars; even though they’ve shown their capability in developing injectables with Agila, biosimilars are way more complex,” said Surya Narayan Patra, an analyst at Systematix Shares and Stocks Ltd in Mumbai. “I’m not factoring any value into their biotech investment.”

Strides’ Agila unit contributed Rs.1,370 crore or 60% of the company’s revenue last year, according to its annual report. Generic drugs accounted for the balance.

“Sales at the company’s business excluding the Agila unit fell 14% in the three months ended 30 June,” Strides said in a filing to stock exchanges.

“After the dividend payout, the remaining business is hardly worth Rs.200 to 250 a share,” said Mahida. “If the stock price is lower than that after the dividends have been paid, it might be worth keeping the shares.”