Torrent Pharmaceuticals deal with Elder Pharmaceuticals' worth Rs. 2004 crore

Mumbai based Torrent pharmaceuticals has announced the acquisition of Mumbai based Elder Pharmaceuticals' branded domestic formulation business in India and Nepal for Rs. 2004 crore.  

Elder pharma's Indian business comprises a portfolio of 30 brands including market leading brands in women healthcare, pain management and wound care.  Torrent with a turnover of Rs. 32,000 crore will fund the acquisition with internal accruals and bank borrowings.  Under the proposed transaction, Elder pharma which has six manufacturing facilities will for the next 3 years continue to manufacture and supply the products for Elder pharma. The business currently stands at Rs. 500-600 crore out of total Rs. 1000 crore domestic formulations business.  

But market is not able to grasp the know-how of the deal. Elder pharma lost more than 8% and Torrent too lost more than 4% on day of acquisition.  For Elder pharma the major part of Rs. 2004 crore will be moved towards debt i.e. Rs. 1148 crore, while Rs. 500 crore are current liabilities.  Moreover now company is left with its 40% business which mostly is low margin based.  These businesses segments are anti-infective and contract manufacturing segments. 

Torrent too will have a effect on its balance sheet.  Current debt of Rs. 913 crore and debt to equity of 0.4 are both poised to increase after this acquisition.  This has led analysts for concern.  Moreover Torrent's margin were always higher than Elder's margins and this will also put a strain on profitability.  While Torrent works on average 22-23% margin, Elder pharma has at-most 16%.  

Analysts are divided on valuation of the deal too.  This deal was supposed to value around Rs. 1700 crore initially but finally landed for over Rs. 2000 crore.  The deal now implies 3.9 times sales and 17.5 times EBITDA, which is on a higher end as per industry multiples.  But apart from this it is expected that Torrent will be able to ramp up the operation better than Elder Pharma and this will, in long run, make this deal a win-win situation for both the companies.