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Aurobindo Pharma divests 51% stake in Chinese subsidiary
Aurobindo Pharma (APL) has announced divestment of 51% stake in its subsidiary,
Aurobindo (Datong) Bio-pharma (ADBPL) to Sinopharm (China National Pharmaceutical
Group Corp.). After acquisition of 51% equity in ADBPL, Sinopharm will further infuse capital
to enhance its shareholding to 80.5% and reducing APL’s share to 19.5%. The Sinopharm
Group will also infuse sufficient funds to relocate the ADBPL plant as required by the local
government in China along with significantly enhancing capacity and downstream products
leading to better economies of scale and reduced cost of production. Post the divestment,
APL’s investment of 19.5% in ADBPL will be strategic in nature to ensure uninterrupted supply
of raw materials.
While the consideration of the stake sale is not available, the transaction would result in pay
back of loans of $23mn provided by APL to ADBPL. Further, ADBPL which is engaged in the
manufacture of 6APA, a derivative of Penicillin-G, provides APL six intermediaries (derived
from Penicillin-G) valued at around `250cr and used for production of APIs (primarily SSPs)
and anti-infective formulations. APL’s decision to hold 19.5% stake in the subsidiary will
ensure uninterrupted raw material supply and not impact its ongoing operations. This
disinvestment will also improve APL’s overall profitability, as the subsidiary had been
incurring losses (~$10mn as on FY2010). Moreover, cash flows from the deal including the
pay back of debt of around $23mn would aid FCCB repayment due in FY2012.
On the valuation front, the APL stock currently trades at 11.8x FY2012E and 10.2x FY2013E
earnings. We recommend a Buy with a Target Price of `1,565.
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