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Curatio acquisition to strengthen branded portfolio

About the stock: Incorporated in 1959, Torrent remains a key play in branded generics (~60% of sales) with a strong India franchise and growing exports traction.

* Revenues: India & CRAMs (57%), Brazil (9%), US (13%) and Germany (11%)

* Torrent is the eighth largest domestic player and is ranked in top 10 for CVS, CNS, V&M, GI and anti-diabetes therapies in India

Event: Acquisition of Curatio Healthcare

* The company is set to acquire 100% of Curatio Healthcare for | 2000 crore. The consideration includes | 115 crore of cash and cash equivalents in the acquired business indicating an enterprise value of | 1,885 crore

* Curatio has a strong presence in the cosmetic dermatology segment with a portfolio of over 50 brands, marketed in India. Top 10 brands of Curatio account for ~75% of total revenue. With this deal, Torrent Pharma will enter the league of top 10 players in the dermatology segment and will be the leader in the cosmetic dermatology space

* Curatio reported revenues of | 224 crore in FY22 and is expected to post | 275 crore revenue in FY23, thus valuing the deal at 8.4x and 6.9x FY22 and FY23E EV/sales, respectively

What should investors do: Torrent’s share price grew 1.8x over past three years.

* We maintain BUY rating on the stock despite the steep valuation of this deal due to 1) gap filling in dermatology with differentiated and growing portfolio and 2) track record of the company for faster integration and turnaround of acquired assets in the domestic space. Additionally, we expect near term margin dilution in H2FY23 due to this deal to be largely offset by back-ended synergy and integration benefits

Target Price and Valuation: Valued at | 1730 i.e. 37x P/E on FY24E EPS of | 46.7

Key triggers for future price performance:

* Integration of Curatio’s brands along with 600 MRs and 900 stockists for focused approach in cosmetic and paediatric dermatology

* In India, Torrent has expanded field strength by 300 to 4,200 MRs. Also, it forayed into the fast growing trade generic segment for acute therapies

* Torrent has a good presence in Brazil and expects traction for new launches in branded space while Germany tender wins will be key in H2FY23

* Awaiting clearance for Dahej and Indrad facility from the USFDA. New launches are key to offsetting persisting price erosion in business

Alternate Stock Idea: Apart from Torrent, in healthcare coverage we like Cipla

* Cipla has long-drawn strategy of targeting four verticals viz. One-India, South Africa & EMs, US generics & specialty and lung leadership

* BUY with a target price of | 1135

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