Torrent Pharma - Visualising A Deal With Cipla; Key Positives, Negatives: Yes Securities Analysis

Yes Securities Report

We assess the contours of recently speculated deal in the media about Torrent Pharmaceuticals Ltd.’s acquisition of Cipla Ltd.’s promoter stake.

While the deal is hypothetical at this juncture, we attempt to flag off the key positives/negatives and what it means for Torrent.

Upfront, deal would require large capital outlay to buy out promoter stake followed by an open offer. In order to keep debt/Ebitda of combined entity manageable to say around ~three-four times, Torrent Pharma may have to resort to large equity dilution which may be to extent of 40-50%.

Scale of the deal would overshadow Sun Pharmaceutical Industries Ltd.'s acquisition of Ranbaxy (even as Ranbaxy was ~60% of Sun’s sales) and would upend the domestic pharma pecking order with combined entity owning ~35 brands each more than Rs 1 billion.

Operationally, Cipla and Torrent have complementary presence with not much overlap; albeit it would also bring a larger U.S. business into Torrent’s fold, a not so keen geography for its management.

Notwithstanding domestic synergies, sheer size of integration and need to rationalize would compound on top of our debt and return on capital employed dilution concerns.

While we take this opportunity to roll over to FY25 and raise rating to 'Add' as we bump up estimates after Q1 FY24 results, clearly our stance is hinged on Torrent as a standalone entity; any deal with Cipla would bring lot of uncertainty around execution, debt and ROCE dilution.

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