Tor­rent stretches bal­ance sheet to ac­quire Unichem’s In­dia busi­ness

Mint Asia ST - - Mark To Market -

Unichem Lab­o­ra­to­ries Ltd gains sig­nif­i­cantly in the near term from the sale of its do­mes­tic (in­clud­ing Nepal) phar­ma­ceu­ti­cal busi­ness to Tor­rent Phar­ma­ceu­ti­cals Ltd. The Street, it ap­pears, was al­ready clued into the deal. Unichem’s shares have risen by 24% since 18 Oc­to­ber but Mon­day saw a slight de­cline.

At the cur­rent price of Rs310, its mar­ket cap­i­tal­iza­tion is Rs2,818 crore, and it is get­ting paid Rs3,600 crore for the In­dia busi­ness alone. This busi­ness earned Rs842 crore in rev­enue or about 60% of the com­pany’s stand-alone rev­enue in fis­cal year 2017 (FY17). Unichem has said it plans to re­turn over half the money to share­hold­ers. If it re­turns half, it works out to Rs200 apiece pre­tax, but share­hold­ers should ex­pect a lower amount post-tax.

Once the pay­out is done, at­ten­tion will shift to the longer term, with Unichem plan­ning to focus on its in­ter­na­tional busi­ness. Re­tained prof­its from the trans­ac­tion will be in­vested in re­search and de­vel­op­ment, es­pe­cially for the US mar­ket where it will file about 20 generic drug fil­ings a year over the next three years, ac­cord­ing to a Mint re­port.

How this works out re­mains to be seen as the US generic mar­ket has turned into a tough one, what with price ero­sion, com­pe­ti­tion and strin­gent in­spec­tions that have tripped plans of many firms. While the fil­ing plan may be ag­gres­sive, ap­provals take time.

MAR­KET SEN­TI­MENT

Unichem may take the ac­qui­si­tion route to speed up the process.

Com­ing to Tor­rent, the deal is not cheap so why did it do it? One an­swer is scale (and a higher seat at the rank­ing ta­bles). If it had been done in FY17, the ac­qui­si­tion would have added about 40% to the com­pany’s In­dia busi­ness rev­enue.

In scale, Tor­rent moves up from num­ber 13 to 5 in terms of sales, as per AIOCD Awacs data, and its mar­ket share moves up from 2.4% to 3.4%.

Apart from scale, Tor­rent also liked the fit with its own port­fo­lio. It cites Unichem’s port- fo­lio hav­ing a two-thirds con­tri­bu­tion from drugs to treat chronic/sub-chronic ail­ments (such as hy­per­ten­sion). It im­proves the depth of Tor­rent’s ex­ist­ing port­fo­lio, rather than adding sev­eral new cat­e­gories which may then have stretched its re­sources. In ad­di­tion, it gets Unichem’s plant at Sikkim and 3,000 em­ploy­ees.

Tor­rent’s pre­sen­ta­tion talks about cost syn­er­gies and its own pro­duc­tiv­ity track record. Chances are it will seek to trim the head­count some­what, im­prove pro­duc­tiv­ity and elim­i­nate over­lap­ping func­tions or ac­tiv­i­ties to lower costs.

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