Brokerages are not thrilled by Torrent Pharma's recent acquisition of Curatio Healthcare. Most feel that the deal is pretty expensive.
The domestic pharmaceutical player announced its acquisition of Curatio Healthcare for ₹2,000 crore to strengthen its presence in the dermatology segment. It has entered into a definitive agreement to acquire a 100 percent stake.
"With this deal, Torrent Pharma will enter the league of top 10 players in the dermatology segment and will be the leader in the cosmetic dermatology space," the company said.
Chennai-headquartered Curatio has a portfolio of over 50 brands, including Tedibar, Atogla, Spoo, B4 Nappi and Permite, in the cosmetic dermatology segment. Its top 10 brands account for around 75 percent of total revenue.
Curatio clocked a revenue of ₹224 crore in FY22, with dermatology accounting for 82 percent of the revenue. However, market analysts are not much upbeat about the acquisition owing to the pricey valuations of the deal, leading to downgrades.
Let's see why the brokerages are not excited about this acquisition:
Kotak Institutional Equities
As per the brokerage, this deal is not a bargain. Despite Curatio’s healthy growth outlook, improving margin profile and Torrent’s robust track record of accruing synergies, the deal is pricey and is 5-9 percent EPS dilutive over FY2023-25E, it argued.
“Torrent Pharma is trading at an elevated valuation of about 30 times FY2024E EPS, and we await a better entry point,” it added. Kotak downgraded Torrent Pharma to ‘reduce’ from ‘add’ with a lower fair value of ₹1,515.
Citi also believes that the deal is ‘expensive’. It has a 'Neutral' rating on the stock with a target price of ₹1,700 per share.
“Curatio is a good strategic fit but it is expensive and earnings dilutive. It can turn out to be 9 percent/5 percent EPS dilutive in FY23/24. It may take 2-3 years to turn earnings accretive,” said the brokerage.
Meanwhile, domestic brokerage firm Motilal Oswal reiterates its Neutral rating on its limited upside potential, with a target price of ₹1,500. It also tweaked its EPS estimate for the company by -2 percent for FY24 to factor in the acquisition.
While the brokerage retained its buy call on the stock with a target price of ₹1,850, it said that in the near term, the Curatio acquisition will increase Torrent Pharma's net debt and it sees this acquisition as EPS dilutive. However, the deal is a strategic fit for TRP, given that it gives presence in high growing cosmetic derma segment and can enhance the profitability of the Curatio portfolio with cost synergies, geographical expansion and price hikes as well as accelerate the topline growth, it added.
This brokerage also has a buy call on the stock with a target price of ₹1,724. It noted that the Curatio acquisition is one of the most expensive deals in domestic pharma. The synergies from this deal should reflect in FY25, as well as the benefit from greater MR productivity and the expansion to the north and east zones, it added.