Lupin's fund raising plan: Acquisition in the offing?

Though the move may lead to equity dilution, it can boost shareholder returns

Lupin caught the investors' attention on Tuesday, as the company’s board gave an in-principle nod to raise funds up to Rs 7,500 crore through issue of securities (equity, GDRs, ADRs, convertible bonds, etc). The news, which will result in equity dilution of over nine per cent at current prices, led to some nervousness in the market, with the stock falling 2.12 per cent to close at Rs 1,772.65. But, investors need not worry.

Analysts as Sarabjeet Kour Nangra at Angel Broking said since it was just an enabling resolution and the company had not indicated when it would be raising the funds but will be doing so as per the need arises, the fall in the stock price was not to the extent of the likely level of equity dilution. Hence, Nangra has maintained her Neutral ratings on the stock.

The other factor is that the company has a strong balance sheet and may not require so much of capital for only capex. And hence, it also points towards the possibility of inorganic growth the company may be looking, believe analysts. In the past, the company has been utilising opportunities regularly to grow inorganically, and this time it may be looking at a big-ticket acquisition.

Analysts at Reliance Securities had said Lupin continues to scout for brand/technology/business acquisition opportunities to drive growth further. Russia and Europe look favourable strategically. They expect the ticket size to be $1 billion (as per current resolution, the company will be raising $1.2 billion).

In May, Lupin had acquired Medquimica, a Brazilian company, having annual sales of $30 million. This was to strengthen its operations in the Latin American market. A year ago, Lupin had acquired Laboratorios Grin in Mexico. Thus, any acquisition using the proposed fund-raising route will be directed towards driving growth and, therefore, equity dilution will not be the only factor that the street will look at.

Meanwhile, the company has been going through a soft patch of growth now. It saw a subdued March’15 quarter.  

Nevertheless, this is a temporary phase and as the new product approvals catch pace, the US growth for Lupin may rebound.

Analysts at Ambit factor in an accelerated approval rate in the US during FY16-18 and expect Lupin to receive 120 approvals. Gastro drug Nexium generics and lipid lowering Welchol approvals can drive growth.