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Premium: Strides Arcolab Declares Rs. 500 Dividend, a 56% Yield – Good Deal?

This is an archive for Capital Mind Premium subscribers, sent on 14th December 2013.

The Case of Strides Arcolab

Strides Arcolab recently sold it’s Agila Specialties division to Mylan for $1.75 billion. They will now use the money to cut out short term debt and distribute $525 million to shareholders, which translates to Rs. 500 per share. (They have about 6 crore shares)

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Out of the payout, $250 million has been held back due to an FDA letter about one of the facilities of Agila, and the management believes that will be resolved in a year. When that money comes, CEO Arun Kumar says they are quite likely to distribute that as well.

The share is currently at Rs. 891. The Rs. 500 dividend means the company’s share price, post-dividend, will fall by Rs. 500.

Can I buy the stock now, and sell post dividend to claim a capital loss?

Short answer: You have to hold for at least three months after the record date.

Long answer: I know what you’re thinking. You have made humongous short term capital gains by investing in stocks this year, but now you have to pay short term capital gains tax at 10%. You can save that tax if you introduce a capital loss, but you don’t want to actually lose money. So you hope you can “create” a capital loss by doing what is called “dividend stripping” – buying before a dividend and selling immediately after.

The Income Tax department also knows what you are thinking.

There’s a law against dividend stripping, which says that if you buy within three months before the record date of a dividend, then you need to hold the stock until at least three months more, otherwise you can’t use the short-term capital loss to offset any gains.

However, given the quantum of this dividend (more than 50% of the stock price), it might be useful to hold for three months anyhow.

The record date is December 20, 2013. Purchases before December 18 will get the dividend.

Is the stock worth buying?

I really don’t know how much is left but let’s do a quick rudimentary analysis. At Rs. 892, and a dividend of Rs. 500, you will pay just Rs. 392 for the stock. If the company gets the additional $250 million, that’s another Rs. 1,500 crores. Assuming they distribute Rs. 1,200 crores of it, you get another Rs. 200 per share.

They have about $50 million of long term debt, and $75 million of cash after all of this.

That leaves a value of Rs. 192 per share. Is the rest of the company worth this much? It’s about 22% of the share price today. The Agila unit provided 58% of revenues, and 80% of EBIDTA, and the rest of the company still has to service the longer term debt.

However, the company sounds like a good deal, with Biotech research (they have a lot of ANDAs), biotech generics (a plant coming up in 2014) and a subsidiary in Sequent, a veterinary generics company. (Read this Forbes article)

These parts of the company could have a significant upside. I like the “lumpy” nature of biotech stocks, where you might not see much happening until one day things turns hugely positive because of a drug getting approved. I also think the ecosystem is very positive for a global player from India, considering the weakness in the rupee. The lower debt keeps the company off interest rate risk which is now a global issue for the next two years.

I like the company, and I’m willing to take a risk. Yes, Indian pharma companies are taking a beating from the US FDA, but I believe some of it is driven by competition and fear. (And that remains a risk)

The Chart

Premium: Strides Arcolab Declares Rs. 500 Dividend, a 56% Yield - Good Deal?

We saw some institutional selling recently. The share just bounced of near term support.

The Capital Mind Premium Stock Portfolio

While we have been speaking a lot about the Macro in the Capital Mind Premium letters, we’re also going to start building a longer term portfolio with just 10-15 stocks. This stock portfolio is hugely volatile, so we d*o not “recommend” these stocks, or provide “tips”. There is an analysis that describes the case, and we just allocate the stocks to a portfolio. (And we take real positions in it)

What we will do is put in a “theoretical” Rs. 500,000 (five lakh) allocated between stocks. Idle money goes into a liquid fund. I’ll put Strides in (10% of portfolio) for now with a very wide stop of 715.

Disclosure: Long the stock.

Review: What Happened to IIP and CPI Inflation?

Just as we’d predicted in the last premium letter, IIP came in quite low at -1.8%. While it was something we could glean from public data, it seems the market was quite surprised, dropping 1% yesterday after the news.

Premium: Strides Arcolab Declares Rs. 500 Dividend, a 56% Yield - Good Deal?

CPI Inflation came in at a ludicrous 11.24%, which is even higher than we expected (and we expected a “high” number, largely from food inflation, which seems to have been the case).

Premium: Strides Arcolab Declares Rs. 500 Dividend, a 56% Yield - Good Deal?

Impact: The immediate reaction of Dr. Rajan, Governor of the RBI, was to state that inflation was higher than he would like, and growth was lower than he would like. But he would take a measured view, he said. The problem is that the FCNR swap has resulted in Rs. 60,000 crores of additional money printing, and inflation is, in the end, a problem of too much money chasing the same goods. Yes, it could be solved by government measures now, but the too-much-money thing is all RBI.

We expect a small rate hike if on Monday, WPI inflation is above 7%.

Premium: Strides Arcolab Declares Rs. 500 Dividend, a 56% Yield - Good Deal?

Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

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  • ANISH says:

    Hi Deepak,
    are you sure about the eligibility for short term capital losses? i heard that you need to have bought BOTH 3 months before the ex data and hold it for 3 months after ex date
    regards
    anish

    • Anish: It’s either. Section 94(7) is like this:
      Where—
      (a) any person buys or acquires any securities or unit within a period of three months prior to the record date;
      (b) such person sells or transfers—
      (i) such securities within a period of three months after such date; or
      (ii) such unit within a period of nine months after such date;
      (c) the dividend or income on such securities or unit received or receivable by such person is exempt,
      then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.
      This means either you buy three months prior: (a) is invalid, or you sell more than three months after: (b) is invalid. if both (a) and (b) are valid, then the dividend stripping is not allowed.