Shares of Gland Pharma fell 5.43 percent to ₹1,777.60 on November 30, a day after the company announced the acquisition of Cenexi Group.
"Gland Pharma, a generic injectable focused CDMO company through its wholly owned subsidiary Gland Pharma International, entered into a put option agreement to acquire 100% of Cenexi Group for an equity value not exceeding euro 120 million," the company said in a BSE filing.
As per the filing, Cenexi, along with its subsidiaries, is engaged primarily in the business of contract development and manufacturing organisation (CDMO) of pharmaceutical products with expertise in sterile liquid and lyophilised fill finished drugs, including oncology and complex product capabilities.
The stock hit its 52-week high of ₹4,060 on January 6, 2022, and at present (as of November 30) it is 128.4 percent down from the 52-week high level.
Brokerages retain views
Brokerage firms retained their views on the stock after the acquisition announcement as some saw limited benefits for Gland from this deal.
Brokerage Nirmal Bang Institutional Equities has a 'buy' call on the stock with a target price of ₹2,472.
However, it downgraded Gland's multiple from 28 times to 26 times due to uncertainty about the implication of the parent's financial condition and continuous cost pressure at least in the near term.
"We maintain a 'buy' rating on Gland Pharma with a revised target price of ₹2,472, valuing it at 26 times PE on Sept’24E Gland EPS and 10 times of CY24 Cenexi EV/EBITDA," said Nirmal Bang.
The brokerage firm highlighted that the return ratio of Cenexi is in the single digit and revenues were also muted between CY19-21 due to reducing the focus on low margins ampoule business. Moreover, due to energy crises in the EU, CY22 margins are likely to remain under pressure and not comparable.
The implied valuation of this deal is 10 times FY21 EV/ EBITDA and 1.25 times EV/sales, said the brokerage firm.
Considering the margins and return ratios, Nirmal Bang believes the valuation is reasonable. The deal will also provide Gland access to manufacturing in the EU, which is essential for EU-branded business. It will also provide access to a different forms of complex products and the opportunity to cross-sell existing clients.
"We expect margins and return ratios of Cenexi to improve in the long term with synergy benefit, change in mix and improve efficiency. Due to different cost structures, we are separately valuing the Cenexi Group and assigning ₹75 per share value based on 10 times CY24 EV/EBITDA," said Nirmal Bang.
"On Gland front, although we are not positive about the US generics market, we like Gland Pharma because of its presence in low competition injectable segment, ability to build economies of scale with a partnership model and a strong compliance track record," the brokerage firm said.
Motilal Oswal Financial Services has a 'buy' call on the stock with a target price of ₹2,470, citing the acquisition would also provide the company with the technical know-how in sterile forms, including ophthalmic gel, needleless injectors, and hormones.
"The EV/sales is about nearly 1.2 times CY21/CY22E. The EV/EBITDA is about 10 times CY21 and 8 times CY22E. This is in line with generics business valuation," said Motilal Oswal.
"While we raise our EPS estimate by 3 percent for FY24 to factor in additional business due to acquisition, we note that the acquisition is margin dilutive. Also, the return ratios of Cenexi (post-acquisition) for CY22E would be much lower than Gland. Accordingly, we reduce the PE multiple to 28 times from 31 times to arrive at a price target of ₹2,470 on a 12-month forward earnings basis," said Motilal Oswal.
Brokerage firm Elara Securities retained a 'buy' call on the stock with a target price of ₹2,300, citing at 10 times CY21 EV/EBITDA, the acquisition seems to be reasonably priced and may be funded via cash (Sep-22 cash balance nearly ₹38bn).
"Owing to near-term earnings strain, we cut FY24E earnings estimates by 4 percent. We maintain a 'buy' but pare our target price to ₹2,300 from ₹2,500 earlier, on 24 times FY25 P/E (earlier 30 times on FY24 P/E)," said Elara.
Elara pointed out Cenexi has entered into contracts with three companies for biologics products, which could fasten Gland’s foray into biologics.
Brokerage firm Kotak Institutional Equities maintained a 'reduce' call on the stock with a target price of ₹1,800, citing the deal will offer limited benefits for Gland.
"We expect Cenexi to constitute nearly 25%/15% of the combined entity’s FY2024E sales/EBITDA. Apart from a higher scale, we see limited benefits from this deal for Gland. While Cenexi’s flat sales growth is concerning, given the EU manufacturing base, its margin is unlikely to scale up to Gland’s level even in the long run," said Kotak.
According to a MintGenie poll, an average of 18 analysts have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of broking firms. These do not represent the views of MintGenie.
