Torrent Pharmaceuticals - Elder acquisition - pain now relief later... - ICICIdirect

Torrent Pharma has signed an agreement with Elder Pharma to acquire the branded domestic formulations business (India & Nepal) for Rs. 2004 crore. The branded domestic formulation business of Elder comprises a portfolio of over 30 brands, which fall in therapies such as women's healthcare/neutraceuticals, pain management and wound care. The annual sales of these brands are ~Rs. 414 crore with EBITDA margins of 35%. The deal works out to ~5x sales and 13.8x EBITDA. Under the deal, Torrent will also add a field force of 1100 MRs to its tally of 3400 MRs. Torrent would fund the acquisition through a mix of internal accruals and debt. The transaction is expected to be closed in the first of 2014.

Elder is ranked fifth in the flagship women's healthcare/neutraceuticals segment after Wockhardt, Ranbaxy, Abbott and Mankind. The largest brand Shelcal along with its extensions registered revenues of Rs. 214 crore in the last 12 months ending November 2013, as per ORG-IMS data base. Overall, it is the 25th largest brand in IPM ranking. The sales of other big brands along with line extension are Chymoral Rs. 82 crore and Eldervit Rs. 22 crore. With this acquisition, Torrent's market share in IPM will improve from 2.0 to 2.7 and so will the ranking from 17 to 12. The transaction involves the transfer of employees engaged in sales, marketing and operations of the India business but does not involve manufacturing facilities. Under the agreement, Elder will continue to manufacture and supply the products at its existing manufacturing facilities for Torrent for a period of three years.

Acquisition multiple, funding issues short term overhangs

Markets are likely to remain circumspect as the deal at 5x is a bit more costly than earlier thought. Also, debt/equity will be stretched beyond 1 for FY15 as Torrent will be raising substantial debt to fund the acquisition. In the long run, however, the transaction augurs well as it will strengthen Torrent's position in women's healthcare/neutraceuticals & pain management as these brands rank No. 1 one in their respective category. As the deal will be through in FY15, we roll forward our estimates to FY16. Since the management has indicated the deal will be EPS accretive after three years, we have changed our methodology to EV/EBITDA from PE. We now value the stock at 8x FY16 EV/EBITDA i.e. Rs. 530.

Source : Equity Bulls

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