The share price of Strides Arcolab Ltd has risen by nearly 2.5 times in a year, and it made good use of the increase to raise nearly Rs 455 crore through a qualified institutional placement (QIP). The pharmaceutical company intends to use the money to meet its acquisition-related payments, repay debt or make other investments.
The issue also bolsters Strides’ net worth, as it has debt of Rs 1,683 crore (of which foreign currency convertible bonds, or FCCBs, account for over one-fourth) as of 30 June, and a debt to equity ratio of 2:1. Post-issue, other things remaining constant, this ratio will fall to 1.3:1.
Also See Steady Growth (Graphic)
Apart from strengthening its balance sheet, the issue adds to its Rs 78 crore cash balance as of June. Strides has to pay around Rs 500 crore to complete two acquisitions, as a result of a restructuring of its partnership with South Africa’s Aspen Group. On completing these acquisitions, it gets full control over the facilities, products and rights belonging to these companies.
The issue proceeds will thus be used to meet existing obligations, including acquisitions, whose impact is already factored into its valuation. The QIP issue has resulted in its equity increasing by 22%.
Furthermore, it has outstanding FCCBs, which if converted, will result in further dilution. Despite all this, Strides’ share has remained quite steady, because of investor expectations that these investments will translate to higher sales and profit growth.
Its tie-ups with global pharmaceutical companies to develop and supply products are expected to drive its performance. In the six months ended 30 June, its revenue rose by 44%, primarily due to licensing income from its tie-up with Pfizer Ltd. Its net profit rose by 60% during this period.
While the QIP does give Strides much-needed financial flexibility, investors will also expect it to maintain earnings growth, on an expanded equity base. Its first-half results were good and it needs to prove it can sustain it in the second half as well, else it runs the risk of disappointing investors.
Graphic by Yogesh Kumar/Mint
We welcome your comments at email@example.com