Torrent Pharma’s acquisition of Elder Pharma’s branded domestic formulation business in India and Nepal has not gone down too well with the Street. Though the brands will enhance Torrent’s portfolio, increasing debt and its ability to scale up the business are key parameters that the Street will keep an eye on. The Rs 2,000 crore deal will increase Torrent’s current debt of Rs 913 crore and debt to equity at 0.4 as of September 2013.
The company’s plans to fund the acquisition through a mix of internal accruals (it has cash to the tune of Rs 800 crore) and debt. This coupled with lower margins for Elder’s product portfolio and higher employee costs could pull down the profitability of the of Torrent Pharma. While Torrent has overall margins of 22-23%, Elder’s margins at the operating level are around 16%. Given these concerns, Torrent corrected 4.14% to close at Rs 479 on Friday, Elder’s loss was much more at 8 percent. The stock closed at Rs 298.30.
Analysts are divided on deal valuations. Though some say that Torrent could have bargained harder given that Sanofi among others passed it over, Ranjit Kapadia of Centrum Broking believes that the deal is fair considering that the buzz around the deal was in the region of Rs 2,600-Rs 2,800 crore. At Rs 2,000 crore, the deal is valued at 2 times annual sales of the 30 brand product portfolio with the largest brand Shelcal having sales of around Rs 160 crore annually. While the deal is similar to the one Piramal Healthcare did with Abbott Laboratories (9 times sales), manufacturing units are not included in the current Torrent-Elder deal.
In addition to the key brands, a major positive for Torrent is the fact that a majority of the acquired brands do not fall under the ambit of price control which gives the new owner the flexibility to adjust prices without fear of price erosion. The deal will also help Torrent fill the gaps in its portfolio such as women’s health.
For Elder, the sale would help it prune its debt of Rs 1,148 crore (long term debt) and Rs 500 plus crore of current liabilities as on June 2013. The company will however be left with just 40 percent of the business that comprises of low margin anti-infective segment and contract manufacturing business. On the positive side Elder will continue manufacturing and supplying the brand portfolio (sold by Elder to Torrent) for some time.
