Torrent Pharma Falls Most In Eight Months After Curatio Deal
Torrent Pharma's Curatio acquisition is expensive, analysts say.
Shares of Torrent Pharmaceuticals Ltd. fell the most in eight months after analysts said the valuation of its acquisition of Curatio Healthcare (I) Pvt. is expensive even as they expect the deal to enhance the drugmaker’s presence in dermatology and inch up its revenue from the segment.
Torrent Pharma has agreed to fully acquire the sunscreen lotions-to-baby-soap maker for a cash consideration of Rs 2,000 crore, according to its Sept. 27 exchange filing.
The acquisition is expected to propel Torrent Pharma to the tenth position in the derma segment from the current 21, the filing said. It will also make the pharma company the second largest in cosmetic dermatology.
The transaction is expected to close within a month.
Shares of Torrent Pharma declined as much as 5.5% during the day—the most since Jan. 27—and were trading 3% lower as of 11:40 a.m. on Wednesday.
Of the 32 analysts tracking the company, 22 have a ‘buy’ rating, six suggest a ‘hold’ and four recommend a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price target implies a 12.9% upside.
Here’s what brokerages have to say about the acquisition:
Motilal Oswal
Maintains ‘neutral’ with a target price of Rs 1,500 apiece, implying a downside of 2%.
Expects limited upside potential post the deal.
Considering Torrent Pharma has had minimal exposure to the dermatology segment (2% of domestic formulation sales), the acquisition would not only increase its offerings, but also widen its scope by connecting with dermatologists and pediatricians.
Considering 600 medical representatives, the MR productivity of Curatio at Rs 3 lakh per capita sales per month is less than industry average.
There is significant scope for improving its MR productivity as well, thereby increasing the margins from the Curatio business.
However, the valuation is expensive, considering recent deals in domestic formulation space.
The management said 15-20% of Curatio’s sales are over the counter, while 80-85% of its sales are prescription-based.
The Ebitda margin of Curatio is about 29%.
Torrent does not expect regulatory agencies to enforce any cap on price hikes on the Curatio portfolio.
Management guided for 24% year-on-year growth in sales from the Curatio portfolio in FY23 and has enough potential to sustain the growth going forward as well.
The company indicated regional expansion of the Curatio portfolio into north/east India as one of the levers of growth in addition to new launches/line extensions.
Elara Capital
Reiterates ‘reduce’ with a target price of Rs 1,480 apiece, implying a downside of 4%.
Acquisition will inch up Torrent’s derma revenue to Rs 344 crore; derma will account for 7.6% of its India business.
Cosmetic derma has a market size of Rs 360 crore in India, posting a CAGR of 16% in FY12-22, faster than the Indian pharma market growth of 10%.
Cosmetic derma accounted for 84% of Curatio’s total dermatology sales. Pediatric products accounted for 60% of sales, acne/face care 20% and hair/scalp care 12%.
Torrent Pharma will absorb Curatio’s 600 medical representatives.
The current MR productivity is at a low of around Rs 3 lakh per MR, which the company aims to scale up to Rs 7-8 lakh in the next few years.
The acquisition is unlikely to be margin-dilutive at the company level.
Curatio has identical gross margins as Torrent, while Ebitda margin was 26.8% in FY22.
Through cost synergies, the company seeks to inch up its margins to 29-30%.
Net intangibles arising from this acquisition are likely to be around Rs 1500 crore, which will be amortized over 15 years.
Rise in debt levels will further increase the interest cost (debt cost at 7-7.5%).
The acquisition will boost Torrent's FY23/24E revenue 0.2%/2.8% and the share of India sales is expected to rise to ~56% in FY24E from 50% in FY22.
The deal though is priced at a steep 8.4x/6.7x FY22/23E EV/sales and 31x/22x EV/Ebitda.
Raises FY24E Ebitda 3% but cut our earnings estimate 8% for FY23E and 4% for FY24E due to a surge in amortisation and interest cost.
Axis Capital
Maintains ‘buy’ with a target price of Rs 1,800 apiece, implying a potential upside of 17%.
The acquisition will enhance Torrent’s presence in dermatology (rank in derma to improve from 21 to top 10) by adding key brands in cosmetic and pediatric dermatology.
After two successful acquisitions (Elder in 2014 in gynae/ pain, Unichem in 2017 in cardio/ gastro), the present acquisition is in specialty dermatology (in cosmetic and pediatric).
With this acquisition, its derma market share is expected to increase from 1.3% to 2.9% based on AIOCD MAT Mar’22.
It expects 25% sales growth in FY23 (post Covid) with company level gross and Ebitda margin.
Also, further improvement in Ebitda margin from FY24 on price hike (as currently below peers) and cost synergies (RM cost, MR productivity, other expenses like distribution, logistics, etc.).
While it adds growth visibility in sales/ Ebitda for FY23/ 24, it would be EPS-dilutive by 7%/ 4% in FY23/ 24 after accounting for amortisation (over 15 years) and interest cost (7%).
Buy rating on strong India franchise, continued focus on filling portfolio gaps (Curatio, Elder, Unichem), steady CFO/ FCF (cash flow) visibility, steady growth visibility (given higher branded generics share) and superior return ratios.
Prabhudas Lilladher
Maintains ‘buy’, hikes target price to Rs 1,850 apiece from Rs 1,750 earlier, implying a potential upside of 21%.
In the near term, Curatio acquisition will increase Torrent’s net debt and this acquisition will be EPS dilutive.
However, the deal is a strategic fit for Torrent, given that it gives presence in high growing cosmetic derma segment and can enhance profitability of Curatio portfolio with cost synergies, geographical expansion and price hike as well as accelerate the topline growth.
Historically Torrent Pharma has managed to integrate successfully Unichem and Elder acquisition, which gives us comfort.
The acquisition cost works out to be at 7x sales and 23x EV/Ebitda on FY23E basis.
However, given the growth profile and scalability margins acquisition cost works out to be 12x EV/Ebitda on FY25E.
Management expects margins to scale up in coming quarters aided by geographical expansion and price hike in key brands like Tedibar along with cost synergies.
Management sees scope of higher pricing for Curatio’s key product, Tedibar given its market share.
Curatio’s 84% of portfolio falls under cosmetic license act and does not fall under purview of any regulatory price cap. Overall sees 5% price hike annually on sustainable basis across Curatio portfolio vs 1-2% taken earlier.
Torrent has supply extension of current manufacturing arrangements for three years with Curatio.
Currently Curatio have limited presence in north and east markets where the company intends to scale up.
Curatio’s 15-20% of revenue comes from OTC channel, including digital
segment.
Initially company will be focusing on generics segment and will be adding new products through OTC route over period of time which offers higher potential of growth.