Will Torrent Pharma’s big bet on JB Chemicals pay off?
Notwithstanding the medium-term gains, the acquisition of JB Chemicals & Pharmaceuticals brings uncertainty over successful integration and generation of synergies.
Torrent Pharmaceuticals Ltd’s acquisition of a controlling stake in JB Chemicals & Pharmaceuticals Ltd, the largest in the Indian pharma sector since 2015, is expected to bring significant cost synergies. It may also help expand its product portfolio across domestic formulations and the fast-growing contract development and manufacturing organisation (CDMO) segment.
JB Pharma’s consolidated revenue in FY25 stood at ₹3,900 crore, which is about one-third of Torrent’s topline. While JB’s Ebitda margin has improved by 390 basis points (bps) to 26.3% over FY22-25, it is 630 bps lower than Torrent’s FY25 margin of 32.6%
The acquisition will complement Torrent’s product portfolio in the cardiac and gastro segments.
“Torrent Pharma gains cost synergies in the near term with potential revenue synergies in the long run," Nomura Global Market Research said in a report dated 29 June.
Torrent will gain entry into a new therapy segment, ophthalmology, a relative niche opportunity with prospects of growing ahead of the broader market, Nomura added.
JB’s presence in the CDMO segment opens up the possibility for Torrent to expand its portfolio in this fast-growing segment. Its CDMO revenue has increased at a rapid pace, clocking 21% CAGR over the past five years. About 58% of the company’s FY25 revenue was from domestic formulations, whereas international formulations and CDMO accounted for 29% and 11%, respectively.
The deal involves the acquisition of the 46.4% stake held by Tau Investment Holdings, a subsidiary of global investment firm KKR, at a price of ₹1,600 per share. Torrent will also acquire a 2.8% stake held by certain employees, in addition to the mandatory 26% open offer, implying a potential total outgo of about ₹19,500 crore.
Open offer
The acquisition will be followed by a merger, fixed at a ratio of 51 Torrent shares for every 100 JB shares. The implied price, as per the swap ratio, stands at ₹1,713, against an open offer price of ₹1,639 apiece. Investors may not be too keen on the offer, which is evident from the 9% drop in JB’s shares since the announcement.
KKR purchased the stake in JB in March 2020 at ₹372.50 (the effective price after a share split), implying a return of 3.3x over a five-year period. Yet, the acquisition looks attractively priced for Torrent with an EV-to-Ebitda ratio of 26.4x for FY25, lower than Torrent’s 31x. EV, or enterprise value, refers to a company’s market capitalization plus net debt.
Further, the EV-to-sales ratio of 7.2x is lower than 8.4x for Torrent’s acquisition of Curatio Healthcare in September 2022. Torrent had a net debt-to-Ebitda ratio of 0.6x at FY25-end, which should help it mobilize debt for the acquisition. Yet, with almost ₹19,500 crore of potential outgo in an all-cash deal, this could stretch Torrent’s near-term finances.
Besides, the size of the acquisition at more than five times its previous largest deal completed in 2017 poses execution challenges.
“From a financial perspective, we estimate that with synergies, the merger would become PAT neutral by the end of FY28, assuming the open offer does not go through," JM Financial Institutional Securities Ltd said in a 30 June report. However, net profit could be impacted by 10% in FY28 if the maximum number of shareholders opt for the open offer, it said.
Torrent’s shares are down from the intra-day gain of over 4% after the announcement. The stock trades at about 47x FY26 earnings estimates, as per Bloomberg consensus.
Notwithstanding the medium-term gains, the acquisition does bring uncertainty with regard to successful integration and generating synergies.
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