Strides Arcolab falls on cash utilisation uncertainty

The Indian company is expected to get a further $250 million if it is able to meet certain conditions

The Strides Arcolab scrip was down 11% over the last two days after the company announced a $1.6 billion (Rs 9,300 crore) deal to sell its specialties unit to US generic major Mylan.

The company is expected to get a further $250 million if it is able to meet certain conditions including investments it has to make to the tune of $125 million.

While earlier reports about a sale pegged the deal value at $2 billion could be a reason, the confusion regarding the utilisation of the money received from Mylan could be the cause for the bearishness on the counter, feel analysts.

The Strides Arcolab management has indicated that it intends to distribute the cash of about $700-$800 million to the shareholders which translates into Rs 700 -Rs 750 per share after paying for debt, transaction costs and retaining $100 million capital to fund Agila Biotech, its bio similar venture. About $250-$300 million will still remain with the management and how they allocate the capital could decide how the stock fares, says a pharma analyst with a domestic brokerage.

The deal is expected to be closed by September 2013. Given the value of the divested business and the fact that the remaining pharma business is pegged at Rs 200, the stock is unlikely to fall below Rs 800, said the analyst.

Most analysts have a buy or outperform rating on the stock. Abhishek Singhal and Kumar Saurabh of Macquarie's of Macquarie Capital Securities have a target of Rs 1,160 which includes cash distributed per share of Rs 750 and the remaining pharma business valued at 12x CY13 P/E or Rs 360 per share. Strides Arcolab has guided for $190 million of sales and $37 million of EBITDA in CY13 for its pharma business.