Outperform on Torrent Pharmaceuticals, target price Rs 550

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There will likely be an overhang of increase in Torrent Pharmaceuticals' net debt; challenges in integration of Elder Pharmaceuticals business remain key risk. Reuters There will likely be an overhang of increase in Torrent Pharmaceuticals' net debt; challenges in integration of Elder Pharmaceuticals business remain key risk. Reuters
SummaryTorrent Pharmaceuticals has entered into a Rs 2,000 cr deal with Elder Pharmaceuticals.

Torrent Pharmaceuticals (Torrent) has entered into an agreement with Elder Pharmaceuticals (Elder) to acquire Elder Pharmaceuticals' branded domestic formulation business in India and Nepal on slump sale basis for a consideration of Rs 2,000 crore. The transaction has been approved by both the boards, and awaits shareholder and regulatory approvals which are likely to be completed by H1 2014.

The acquisition will transfer 30 brands of Elder to Torrent Pharmaceuticals Ltd, which also involves transfer of employees engaged in sales, marketing and operations of India business. Further, Elder Pharmaceuticals will continue to manufacture and supply products at its existing facilities to Torrent Pharmaceuticals for a period of three years and, in return, Elder Pharmaceuticals will be entitled to manufacturing margins.

In the near term, there will likely be an overhang of increase in Torrent Pharmaceuticals' net debt and pressure on return ratios post the Elder Pharmaceuticals Ltd acquisition. However, we are positive on the medium-term outlook for the bigger and more aggressive Torrent. With ~30% RoE and >20% RoCE, and valuations of ~9.3x EV/EBITDA (FY15E, post the acquisition), valuations are attractive. We maintain Outperformer on the stock, with a target price of Rs 550 (15x FY15E earnings). Challenges in integration of Elder Pharmaceuticals business and inability to achieve the desired synergies remain a key risk to our call.

IDFC

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