Torrent Pharma - Elder acquisition: Medium term woes - Karvy

Torrent Pharmaceuticals has entered into a definitive binding agreement with Elder to acquire its specific branded domestic formulations business in India and Nepal for Rs 20bn. These comprise of 30 brands across 3 therapies - Woman Healthcare, Pain & Wound management & Nutraceuticals. It also involves a transfer of field force of approximately 1100 people.

The total revenues of the brands acquired are Rs 4.14 bn and the deal is valued at 5x sales of these brands. The transaction is expected to be completed by H2CY14. The deal also envisages a 3 year supply agreement with Elder for products manufactured at their existing facilities, it also allows Torrent Pharma(TP)to manufacture part of the volumes at TP identified facilities The acquisition will catapult Torrent Pharma ranking to 12 from the current 17th ranking it currently enjoys.

Outlook and Valuation: We believe in a span of 3-5 years Torrent Pharma would be able to leverage the benefits of the acquisition, but in the medium term, the company would have immediate cost push concerns which would outweigh the synergy benefits. We upgrade our revenue nos by 8.1 % in FY 15E to Rs 48.5 bn on account of Elder Pharma acquisition. We factor higher EBDITAM of 19.5 % as against 18.5 % previously mainly on back of higher gross margins of Elder franchise. However, with the interest cost shooting up to Rs 1.9 bn as against Rs 612 mn previously, we downgrade our EPS estimates for FY 15E by 5.6 % to Rs 30.2. We downgrade our price target by 3.8 % to Rs 455 which is based on 15 x FY 2015E and includes add an option value of Rs 2 for milestone payment. Despite amortisation impact not being factored in, we downgrade our rating from HOLD to SELL.

Source : Equity Bulls

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