Divestment of US subsidiary to leave Aurobindo Pharma cash positive

Divestment of the US subsidiary is at good valuations and will help attain net cash positive status

Aurobindo Pharma may have consistently impressed on the growth front, but it is among the few Indian pharmaceutical majors to have a stretched balance sheet. The drugmaker’s announcement of divestment of a US subsidiary should address this concern, given it will wipe off more than 80 per cent of its gross debt.

Aurobindo has reached a definitive agreement for the sale of Natrol LLC. This will fetch it $550 million (Rs 4,048 crore) on deal completion. Aurobindo had a net debt of Rs 1,445 crore ($191.3 million) and gross debt of Rs 4,777 crore at the end of the April-June quarter. With cash and bank balance of Rs 3,332 crore, the company, in fact, will be cash positive after this deal.

Not surprising, say analysts. “Though the company is divesting a subsidiary that contributes around 5 per cent to its revenue, nonetheless it is getting impressive valuations that will wipe off the entire net debt,” says Ranvir Singh, analyst at Sunidhi Securities.

Natrol reported annual sales of $157 million for the 12 months ended March 31. Aurobindo is divesting at almost 3.5x its sales, which, according to analysts, is a good valuation.

Aurobindo had acquired Natrol in 2014 for $132.5 million. It is also making good returns on its investment. Further, Natrol’s product range mostly included over-the-counter nutritional products (not niche) that have seen single-digit annual growth and were not seen as future growth drivers either, say analysts.

The debt reduction will help Aurobindo command better valuations, says Amey Chalke, vice-president, Haitong Securities. The company, growing at a strong pace in the US, has, however, commanded lower valuations compared to peers, such as Sun Pharmaceutical Industries and Dr Reddy’s Laboratories, due to debt concerns. Lower debt, along with strong business growth, is expected to lead to valuation rerating, say analysts.

Aurobindo is expected to continue posting strong growth, with analysts like Chalke expecting 16-17 per cent annual growth in earnings. While it is yet to resolve certain regulatory issues, such as the recent warning letter it received from the US Food and Drug Administration for its New Jersey facility, analysts are not worried.

Aurobindo’s major growth drivers are its facilities (Unit IV and Unit X in India). It is also seeing expansions and new facilities coming on stream in the near future.

HSBC considers Aurobindo among its top picks, given the stable outlook for the company’s focus segments (generics with cost competitiveness). It expects the US growth to be driven by rebound in injectables in the second quarter, where revenues are estimated to grow 13 per cent year-on-year, and adjusted net profit by 25 per cent, aided by margin expansion.