Accumulate Torrent Pharmaceuticals Ltd For Target Rs. 3,850 - Prabhudas Liladhar Capital Ltd
Acquires JB Chem, Strengthening it’s branded generic business
Torrent Pharma’s (TRP) acquisition of JB Chemicals & Pharma (JBCP) appears strategically compelling, making it the 5th largest player in the domestic pharma market. This will further be strengthening its position in high-margin chronic therapies and opens up many newer therapeutic areas. The deal also adds JBCP’s CDMO vertical, offering diversification and growth optionality.
The acquisition is likely to be debt-funded requiring Rs 122bn to fund acquisition upfront. We see JBCP current OPM of 27–28% to scale to 31-32% (similar to current TRP margins) via sourcing efficiencies, cost rationalization, and pricing actions on keys brands. Historically TRP have managed to integrate successfully Unichem, Elder and Curatio acquisition which gives us comfort.
JBCP is trading at 25x P/E and 16.7x EV/EBITDA on FY27E. This represents a ~25–28% valuation discount to TRP’s current trading multiples. The deal is considered financially attractive and strategically sound with long -term earnings accretion. TRP trades at 40x P/E and 21.5x EV/EBITDA on FY27E for the combined business. We maintain our Accumulate with TP of Rs3,850/share, valuing at 25x EV/EBITDA on FY27E for combined entity.
Contours of the Transaction:
* Primary Stake Acquisition: TRP will acquire 46.4% controlling stake in JB Chemical (JBCP) from Tau Investment Holdings Pte Ltd (KKR entity) at a price of Rs1,600/share, amounting to a total consideration of Rs ~119 bn (11% discount to friday’s closing price).
* Employee Share Purchase: TRP has also expressed its intent to acquire an additional 2.8% stake from JBCP employees at the same price of Rs 1,600/share.
* Open Offer: TRP will have to launch a mandatory open offer to acquire up to 26% stake at Rs 1,639/share (9% discount to friday’s closing price).
* Merger Ratio: TRP has proposed a merger with JBCP with a swap ratio of 100 JBCP shares for 51 TRP shares, implying a valuation of Rs 1,703/share (5.4% discount to friday’s closing price)3
* Regulatory Approvals: The completion of the transaction is subject to clearances from SEBI, Stock Exchanges, the Competition Commission of India (CCI), National Company Law Tribunal (NCLT), and other relevant authorities.
Strategic Rationale:
* Post-merger, the combined entity is expected to derive approximately 56% of its revenues from domestic formulation and 80% of revenues from high-margin branded generics and CDMO businesses, strengthening TRP profitability profile.
* Acquisition of JBCP provides access to high growth therapeutic area of domestic business, particularly in chronic therapies, which constitute around 65% of JBCP’s revenues.
* Additionally, the deal marks TRP’s entry into new therapies like ophthalmology, IVF and Nephrology. In addition, although there is an overlap in cardiac, gastro-intestinal and gynaecology, most of their domestic portfolios are complementary to each other.
* Post-merger, the combined entity is expected to become the 5th largest player with ~4.6% market share in the domestic market, underlining the scale and competitive advantage derived from this consolidation
* JBCP’s CDMO segment further enhances the strategic appeal of the transaction, a high-margin vertical that supports business diversification and long-term scalability
Financial Metrics:
The deal appears EPS dilutive with an expected EPS hit of 15% in FY27E, however will turn EPS neutral in FY28E. The deal will be cash accretive adjusted for amortization expenses from year 1 itself. TRP will require Rs125bn of debt to fund acquisition. The combined entity will have +Rs14bn of net debt. with net debt/EBITDA at 2.6x. Assuming remaining 51% stake of JBCP gets merged with TRP, equity dilution for TRP will be to tune of ~12%.
Concall highlights:
* TRP’s Rx rank to improve from 10 th to 4 th in India for combined entity.
* Continued strong performance of mature brands like Cilacar and Nicardia is essential. TRP believes these have +5 years of growth runway.
* TRP will have access to GPs and nephrologist where JB has strong presence
* TRP sees potential to build presence in Russia, South Africa, and US, where JBCP already has a base.
* CDMO business is attractive and scalable, JBCP has already built a robust platform with sticky customers and stable volumes.
* Minor overlap risk (e.g, probiotics); no major divestments expected.
* It also brings in strong brand portfolio, and high MR productivity (~Rs0.8 mn/month).
* Merger contingent on majority of minority shareholder approval from JBCP shareholders.
* Integration to follow the model used in earlier acquisitions like Unichem.
* Completion timeline: 15–18 months (including CCI & NCLT approvals). CCI approval will take 4-5 months post that one month to complete tender offer.
* TRP will fund the transaction with debt; no equity dilution expected
* Pro forma net debt/EBITDA expected at 1.8x and 2.8x including tender offer in FY27, reducing to below 0.5x within 2–3 years. Expected cost of debt <8%. Company should bring down a substantial portion of debt over next 3 years.
* TRP does not have any ESOP policy and hence intend to buyback JBCP ESOP shares.
* Mgmt cited deal to be EPS accretive by FY28E. .
* ROCE is expected to return to 28% by FY28E.
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