Aurobindo Pharma: Acquisition update - Angel Broking

Earlier, during the last week, Aurobindo Pharma Limited announced the signing of a binding offer to acquire commercial operations in seven Western European countries from Actavis. During the concall , management indicated that the net sales for the acquired businesses would be around EUR 320mn in 2013 with a growth rate of over 10% year-on-year. With this the European sales of the company would reach EUR 400mn. Although these businesses are currently lossmaking (to be around Euro 20mn), Aurobindo expects them to return to profitability in combination with its vertically integrated platform and existing commercial infrastructure.

The acquisition will make Aurobindo one of the leading Indian pharmaceutical companies in Europe. Since 2006 Aurobindo has been steadily expanding its European footprint through an increasing presence in UK, Spain and Germany. The acquisition will enable Aurobindo to achieve critical mass in Western Europe with a top 10 position in several key markets, which it plans to leverage to supply or widen its product portfolio, through introduction of its own products especially high margin products like injectiables.

In terms of turning the unit profitable, might take time, as most of the products acquired are new to Aurobindo's portfolio and hence would take time to shift the raw material benefits, the same timeline could be 2-3 years. Thus the key factor to make the acquired unit profitable would be more new product introductions. Thus depending upon the new product introductions, the acquired unit might take 1-3 years to turn profitable. On the positive side, given the acquired unit is the formulation business; it will enhance the overall formulation sales of the company in its sales mix ~85% in FY2015. In terms, of value of the transaction, the company is likely to pay around EUR 30mn and will depend upon the Cash and Net Working Capital position at closing. The company plans to fund the said acquisition through internal accruals, thus is unlikely to strain the balance-sheet. The acquisition would, is completed, and would reflect in FY2015 financials.

In terms of the acquisition, our estimates have been tweaked a little, with sales upgraded by 32.3% yoy to end FY2015 at Rs. 11,214cr, with OPM's likely to be around 14.1% V/s 18.5% estimated earlier (though the new OPM also include benefit of the earlier business improvement in OPM which has been upgraded to 20.0%). With this the new EPS of the company has been reduced by 4.5% to Rs. 32.3 V/s Rs. 33.8 earlier. At CMP, the stock trades at 14.3xFY2015, we remain neutral on the stock.

Source : Equity Bulls

Keywords