BackStrides Arcolab gives India business a boost
Strides' plan is to have a nationwide presence, fill gaps in existing portfolio, create mega brandsbut in niche categoriesand get its sales force to cross-sell products
Premium
Strides Arcolab Ltd’s shareholders seem to think small is beautiful.
Its shares gained by 4.6% on Monday after the firm announced over the weekend that it was paying ₹ 165 crore to acquire a portfolio of drugs from Sun Pharmaceutical Industries Ltd.
These drugs generated a revenue of ₹ 92 crore in the 12 months ended July, according to a company statement.
Strides’ revenue is expected to see a sharp jump in FY16 due to earlier acquisitions. Its revenue is set to triple to ₹ 3,564 crore, according to Macquarie Research. The latest acquisition, therefore, is too small to make a significant difference to sales growth.
What then explains the jump in its shares?
One could be reasonable valuations. The company is paying 1.8 times revenue for a portfolio of drugs for the central nervous system (CNS). This is a niche and profitable segment for the industry.
Also, Strides sells CNS drugs, and a few other nice items. But its presence is concentrated in the southern and western Indian markets. The current acquisition will expand its presence in other locations, especially as the sales team is also moving to Strides.
While the brand revenue may be small in relation to the overall total, it is sizeable if you consider that Strides’ existing branded business in India had a revenue of about ₹ 100 crore.
Strides’ plan for its India business is to have a nationwide presence, fill gaps in its existing portfolio, create mega brands—but in niche categories—and get its sales force to cross-sell products. This acquisition ticks some of these boxes. But the India business, even after this acquisition, will be a relatively small contributor.
That is in line with Strides’ strategy to focus more on the overseas markets, in both developed markets and emerging markets such as Africa and it plans to enter new markets in Russia and South-East Asia. It has raised debt to part-fund its acquisitions. Investors will be watching how these acquisitions contribute to its performance, not just to scale, but to profitability as well.
In the end analysis, while the latest acquisition is no doubt a good one, it does not quite transform the company. What perhaps explains the share price gain is relief among investors at the consideration as a large acquisition would have piled on more debt to its already loaded balance sheet.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
