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On an acquisition spree to enhance derma portfolio

Deal to be EPS neutral over the medium term

* The acquisition of nine brands from Dr. Reddy’s Lab (sales: INR500m for INR2.7b) is the third deal in the dermatology space over the past 12M.

* The valuation in terms of EV/sales stands at 5.4x/4.8x for FY23/FY24. This is higher than its earlier acquisitions.

* Given that the acquisition is funded through debt, we expect the deal to be earnings neutral over the medium term. Although enhancing the derma portfolio is step in the positive direction, increased leverage could slightly dilute the ROCE over the medium term.

* Having said this, we expect 16% EPS CAGR over FY23-25. We value ERIS at 19x 12M forward earnings to arrive at a price target of INR710 and reiterate our BUY rating on the stock

Deal details

* ERIS has acquired a portfolio of nine dermatology brands from Dr. Reddy’s Labs (having primary sales of INR500m for FY23E) for a consideration of INR2.7b. The acquisition would be funded by debt (cost of debt is ~8-8.5%).

* The top brands HydroHeal/Cris ODT/Avarta registered a MAT sales of INR200m/130m/60m, respectively.

* The gross margin for this portfolio stands at about 78-80%.

* Assuming a 15% YoY growth in sales for FY24, the EV/sales turn out to be 5.4x/4.6x for FY23/FY24.

Acquisitions drive derma portfolio expansion

* In FY23, ERIS has been expanding its derma portfolio through its inorganic route.

* Earlier in 3QFY23, ERIS acquired a portfolio of nine dermatology brands from Glenmark (having sales of INR850m) for a consideration of INR3.4b at 4x EV/sales for FY23. The top brands – Onabet/Halobate registered sales of INR300m/220m for the past 12M

* In 1QFY23, ERIS acquired Oaknet Healthcare for INR6.5b at 3.3x EV/Sales for FY22. It added a portfolio of leading brands such as Cosvate and Cosmelite in dermatology and women’s health.

* Overall, ERIS has spent INR12.7b, garnering sales of INR3.5b in the derma space.

Key Highlights from the management Commentary

* ERIS expects a growth rate of 15-20% of the acquired portfolio for the next four years with an average sales of INR80-90m per product.

* The acquired portfolio from DRRD has primary sales of INR500m (FY23E) and had witnessed a CAGR of 8% over the past two years.

* ERIS expects gross margin of 78-80% for the overall derma portfolio.

* ERIS plans to allocate 100 MRs for these brands, of which, 50 will be hired, while the remaining 50 will be reshuffled internally. The total field force is expected to be 640 for the cosmetology segment.

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