Intas: Wish you were listed
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If analysts in the consumer staples industry wish Patanjali Ayurved Ltd were listed, bowled over by its rapid growth, then their counterparts tracking pharmaceuticals may wish the same for Intas Pharmaceuticals Ltd.
Intas is paying £603 million or Rs.5,095 crore to acquire the Actavis generics’ business in the UK and Ireland from Teva Pharmaceutical Industries Ltd. The acquired business had revenues of £250 million, which translates to a price to sales valuation of 2.4 times sales. Profit details were not given but the management told Mint that the business had good margins. But not much can be said about valuations with the available information. It is unlikely to have come cheap, however, considering there were other bidders in the fray.
The acquisition gives Intas scale by making it first or second in its categories in the UK and Ireland, and in FY16 would have increased its overall FY16 revenues by a third. Its effort will be to grow revenues faster than if they were separate and lower costs by eliminating overlapping functions. Being cost competitive and with a larger basket of products will help, especially as the UK and the rest of Europe are competitive markets for generic products.
The acquisition itself comes in the backdrop of the road map to Brexit, which has raised questions on the impact on UK businesses. The only real effect, at present, is the depreciation in the pound versus other currencies. That has made British exports more competitive, which is a benefit. However, the translation effect will mean fewer rupees per pound, which can affect Intas’s reported locally reported financials.
The funding of the transaction will be by debt. Rating agency ICRA had rated its long term debt at AA+ (stable) in June 2016, although it did say a large debt-funded acquisition could be a ‘rating sensitivity’. This is a standard thing to say, however, and Intas’s performance should give confidence that it can service this debt comfortably. The management expects to pay this debt off in three-four years.
The latest available annual report is for 2013-14, which shows a net worth of Rs.2,233 crore and total debt of Rs.630 crore. Its debt figure will now increase by Rs.5,095 crore. However, foreign currency debt is cheap now and can be serviced through its foreign currency earnings, minimizing exchange risk.
The company’s financials are in good shape. In FY16, its revenues rose by 27.4% to Rs.6,569 crore and its operating profit by 48.6% to Rs.1,477 crore. There was a 58.4% increase in its net profit to Rs.882 crore. This acquisition will add about Rs.2,100 crore to revenues. Initially, the debt servicing may see profit grow at lower rates. But this also depends on how it exploits the acquisition by improving the combined sales growth and profits and growth in India and the US. The concern can be if it has bitten off more than it can chew. Being unlisted, however, it can labour away quietly at making the acquisition work, without the quarterly scrutiny a listed company will be subjected to.