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Buy Strides Arcolab – NJ Unit Closed

January 10, 2008

Kotak has come up with a BUY recommendation on Strides Acrolab. Strides Arcolab has shut down its loss making manufacturing operation for OTC and neutraceutical in New Jersey, USA. The facility manufactures soft gelatin, used as a protective layer in medicines and food supplements. This is a rational step as the plant was incurring huge losses due to high manufacturing costs, capacity utilization and regulatory issues.

Stride’s most profitable business by segment, namely, sterile injectables is being strengthened by a capex of US$140 mn in new manufacturing and expansion activities in Brazil (completed), Poland (will be completed in 2008) and new complex in India for oncology and hormone products and additional sterile capacities (Phase- I in December 2007 and phase-II in August 2008).

Kotak expects a partly diluted EPS (assuming part conversion of FCCBs in 2008) of Rs.5.9 and Rs.21.1 for CY07 and CY08, respectively. Kotak maintains a BUY with DCF-based one-year target price of Rs.400. We recommend existing investors to HOLD and can add between Rs 225 to Rs 250 levels or whenever the market corrects.

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