Torrent Pharmaceuticals Rating: Buy | Deal could be marginally value accretive

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Torrent Pharma LAST week announced that it has entered into a definitive agreement with shareholders of Curatio to acquire a 100% stake in the company for an EV of Rs 18.85 bn. Curatio, primarily a cosmetic derma company established in 2005, achieved turnover of Rs 2.24 bn in FY22. The acquisition valuation of 8.4x EV/sales and 30.5x EV/Ebitda (FY22) is higher than for most recent acquisitions in the domestic pharma market (typically 3-4x EV/sales). The company expects to extract sales and cost synergies from the acquisition like it did in earlier deals with Unichem and Elder pharma.

Curatio recorded revenue CAGR of 16.9% over FY16-22, with consistent improvement in Ebitda margin. Management commentary suggests that it expects healthy double-digit revenue growth to sustain in the near term and Ebitda margin to reach the ~40% level in the medium term. Strategically, the acquisition expands TRP’s presence in derma (particularly cosmo derma segment) and provides a platform to build an OTC business over time.

The acquisition will be EPS dilutive by 5-10% over the next three years, as per our estimates. On valuation upside we are neutral here. Given high valuation paid, it is difficult to expect significant value accretion from the deal at this stage, particularly on TRP’s high market cap compared to when it did its earlier acquisitions. The deal could still be marginally value-accretive. We don’t expect any material value destruction as the branded business presents scope for steady growth with price increases and the acquisition is debt funded without causing any balance sheet stress.

Our current estimate for TRP don’t factor in contribution from the Curatio acquisition.

The acquisition may be completed in a month. We have a Buy rating on the stock with a target price of Rs 1,782 based on 17.5x one-year-forward Ebitda (Sep-24 Ebitda). At the current price the stock is trading at 19.1x and 15.8x FY23F/24F Ebitda and 35.3x/ 29.1x/24.4x FY23F/24F/ 25F EPS of Rs 43.4/Rs 52.7/Rs 62.3.

Curatio: Player in cosmetic derma segmentCuratio was established in 2005 by executives of American Remedies, which was merged with Dr Reddy’s in 2001. Curatio primarily focuses on derma segment, particularly in cosmo derma segments. The company clocked revenues of Rs 2.24 bn in FY22. Derma and cosmetic derma in particular contributed 95% and 80% of the sales, respectively. The cosmetic derma market is at Rs 36 bn (MAT Aug 2022) and recorded a CAGR of 16% over the past 10 years, according to the company. This compares to an IPM CAGR of 10% over the period.

Pediatric products (products for babies and children) accounted for ~60% of the sales in FY22. The other key segments are Acne/Face care and Hair/Scalp care, which accounted for ~20% and ~12% of FY22 sales, respectively. The company has a portfolio of ~50 brands, with the top five and ten brands accounting for ~Rs 60% and ~75% of sales, respectively.

Acquisition valuationTorrent will acquire Curatio for Rs 18.85 bn, thus valuing the company at 8.4x EV/sales and 30.5x EV/Ebitda on FY22 sales and Ebitda of Rs 2.24 bn and Rs 600mn, respectively.