The acquisition of the domestic business of debt-ridden Elder Pharma last month could be a new beginning for the Ahmedabad-based drug major Torrent Pharmaceuticals.
Torrent Pharmaceuticals has indicated it is open to more acquisitions in the future, both in domestic and overseas market, according to sources. “The company has a strong balance sheet and is aiming to grow inorganically. It is open to making strategic acquisitions,” a source said.
Ranjit Kapadia of Centrum Broking said, “The company would take at least five to six quarters to settle down, and after that it could look for strategic acquisitions. However, even in that case, it would definitely be a much smaller acquisition, probably in the range of Rs 50-100 crore.”
The company has not specified which areas it is going to eye for an acquisition. However, according to analysts, it could be in the field of dermatology, where Torrent has little presence.
The recent deal gave Torrent access to new therapeutic areas where it was looking at expanding its presence. Pain and wound management and nutraceuticals are areas that Torrent has identified for organic entry in the coming one to two years.
The Rs 2,004-crore Torrent-Elder deal, the largest acquisition of an Indian pharma company by another Indian firm, has definitely stretched Torrent’s balance sheet. The acquisition will be cash flow and earnings dilutive in the first year of operation of the combined entity. Torrent has indicated to generate cash profits in the second half of the second year and turning earnings per share (EPS) completely accretive in the third year.
While the company’s shares had sunk after the announcement (dipping by eight per cent on the BSE on December 14), Torrent expects an 18-20 per cent boost in revenues after the Elder deal.
According to a recent IIFL Institutional Equities report, “An Ebitda margin in excess of 35 per cent is conservative. Large specialty brands in the domestic market have over 80 per cent gross margin. Rough estimates using average employee expenses for the 1,100 people taken on board and 20-25 per cent marketing and promotion expenses, we believe Ebitda margin of 40 per cent is possible.” It added that this will lead to a 90-basis points improvement in overall Ebitda margin in FY15 and FY16.
Even as Torrent Pharma had stayed away from making acquisitions to fuel growth so far,Torrent's peer, another Ahmedabad-based pharma company Cadila Healthcare led by Pankaj Patel had taken the inorganic route to build strong positions in key segments.