Expensive deal valuations to hit Torrent Pharma's near-term earnings

Sales trajectory in domestic formulations and resolution of regulatory issues are other triggers

The stock of pharma major Torrent Pharmaceuticals was down 2.5 per cent in trade as most brokerages termed its Rs 2,000 crore acquisition of Curatio, a cosmetic and paediatric dermatology company, as expensive and earnings dilutive. 
 

Though the acquisition will help the company expand its presence in dermatology segment where it has negligible presence, deal valuations (enterprise value) at 7 times its estimated sales and 23 times its operating profit for the 2022-23 financial year (FY23) are on the higher side. Curatio had reported sales of Rs 224 crore in FY22 and is expected to hit the Rs 275-crore mark in revenues this year. 
 

While most recent deals in the domestic pharma market have been in the 2-4 times sales range, only Mankind Pharma’s acquisition of Panacea Biotec’s formulation brands was at a higher premium of 7.2 times sales, points out Motilal Oswal Research. While Torrent Pharma remains a leading player in the domestic formulations segment, the brokerage is sticking to its ‘neutral’ rating on the stock, given limited upside potential.
 

Torrent Pharma’s previous acquisitions of Elder Pharma and Unichem, for Rs 2,000 crore and Rs 3,600 crore respectively, were 4.5 to 5 times its sales with the recent deal being priced higher due to more buyers eyeing the asset.

 

Say Alankar Garude and Samitinjoy Basak of Kotak Institutional Equities, “With most major pharma companies actively scouting for mergers and acquisitions in India, demand for quality assets will remain elevated, making it increasingly difficult for companies to acquire attractive domestic pharma assets at reasonable valuations.” 
 

The brokerage has downgraded the stock to ‘reduce’ rating post the acquisition. Torrent Pharma is also trading at an elevated valuation of 30 times its FY24 earnings estimates.
 

While the deal includes cash of Rs 115 crore, up to 80 per cent of deal consideration is to be financed through debt. Most brokerages expect the deal to dilute its net profit by 5-9 per cent each over the next two to three years. The company had a debt of Rs 3,400 crore as of FY22. 
 

Though deal valuations are on the higher side, cosmetic dermatology is a fast growing segment as compared to overall dermatology and the acquired company’s top-five brands of Tedibar, Aglota, Spoo, Permite and Clinmiskin are expected to sustain the double digit growth trajectory.
 

The top-five brands accounted for 63 per cent of Curatio’s sales and are expected to grow at over 20 per cent rate in FY23. While Curatio’s operating profit margins at 29 per cent are about 100 basis points lower than Torrent’s domestic formulation margins, the gap is expected to be bridged and improved further by leveraging synergies, optimising costs and correcting price gaps. 
 

Though the valuations are high, JM Financial says that it believes in the company’s successful track record of acquisitions and expects this acquisition to become earnings accretive from FY25 onwards. 
 

The brokerage, however, is maintaining its ‘hold’ rating till the resolution of US Food and Drug Administration regulatory issues (Gujarat-based facilities at Indrad and Dahez), new tender execution in Germany and performance of domestic launches.