Strides Arcolab redeems FCCBs, investors mark share up 2.8%

Pharmaceutical company Strides Arcolab announced repayment of its foreign currency convertible bonds, sticking to its earlier announced plan, thereby lowering its debt to equity ratio to more manageable levels. The company had sold its stake in Australian company Ascent Pharmahealth, which ran its generic pharmaceutical business in Australia and South East Asia, to Watson Pharmaceuticals. Strides had earned Rs 1,200 crore from this transaction, after paying tax.

The current FCCB repayment involves a principal value of $80million and a redemption premium or the accrued interest component of $36million, totalling to $116million or Rs 661 crore at today’s exchange rates. Strides said in a statement that its debt to equity ratio will decline to 0.75:1 after this transaction. As of end-March, it had gross debt of about Rs 2,300 crore and a net debt to equity ratio of 0.6:1. Net debt is the figure arrived at after reducing cash and marketable investments from the gross debt figure.

The sale proceeds from the Ascent transaction are being used to repay debt in 2012, and fund the acquisition of a contract manufacturing plant from Star Drugs and Research Labs for Rs 125 crore. This US FDA approved unit will be used to supply sterile injectables to the US market from the third quarter of 2012.

Strides has benefited from having the necessary manufacturing infrastructure at a time when the US is facing drug shortages in certain therapeutic categories. This has brought orders for Strides and it intends to capitalise on this by signing long term contracts, so that its business does not suffer if the shortages end, said the management in a conference call after its results. The company said that, excluding the impact of the Ascent divestment, its revenues in the March quarter rose by 40% over the year ago period, and its core earnings before interest, tax and depreciation (EBITDA) rose by 64%.

Though the FCCB redemption was a known event, investors were still happy to see it conclude, and the Strides’ share rose by 2.8% to Rs 738 on Wednesday. The fact that the FCCB redemption has happened will not only lower its debt burden, but also rid it of the impact of exchange-related fluctuations. In the current volatile foreign exchange environment, outstanding forex debt tends to play havoc with mark to market losses.

In the March quarter, for example, while its profit before tax and exceptional items was Rs 76 crore, losses on exchange fluctuation ate away Rs 25 crore and changes in fair value of options embedded in FCCBs ate away Rs 1.5 crore. Both items cumulatively caused a reduction in profits by a third. That is likely to fall in subsequent quarters, after the FCCB redemption.

Read the FCCB redemption press release here.

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