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n Divests 51% stake in China subsidiary
Aurobindo Pharma (ARBP) has announced divestment of 51% stake in its subsidiary Aurobindo (Datong) Bio–pharma (ADBPL) to Sinopharm (China National Pharmaceutical Group Corp.) for an undisclosed consideration. ARBP has invested, till date, USD 70 mn in the subsidiary. Post fresh capital investment (~USD 100 mn) proposed by Sinopharm, ARBP’s stake in the subsidiary will reduce to 19.5% through natural dilution. Moreover, Sinopharm would pay back ARBP inter-corporate loan of USD 23 mn, post closure of the deal (by FY11 end), as per the agreement. ADBPL supplies, annually, to ARBP INR 2.5 bn of six intermediaries (derived from Penicillin-G), for production of APIs (primarily SSPs) and anti-infective formulations. The company’s decision to hold 19.5% stake will ensure uninterrupted raw material supply and will not impact current operations, as per the company.
n Our view
We believe this divestment will help ARBP streamline its business by divesting non-core businesses where profitability has been depressed (ADBPL has been a loss-making subsidiary with annual losses of USD 10 mn in FY10). Prior to this divesture, in FY11, the company had divested its stake in Cephazone Pharma (a 50% JV in US). We estimate reduction in losses from divestment of ADBPL to positively impact FY12 adjusted EPS (INR 105 per share) by 3-4%. However, we await deal closure before incorporating the same into our estimates.
Further, incremental cash inflows (including USD 23 mn of inter-corporate loan repayment) from these divestments will enable repayment of USD 205 mn FCCBs (including premium on redemption), due for redemption in May 2011. We highlight that the company has raised USD 125 mn ECB credit for funding the capex and will utilise internal cash flows from operations to fund balance FCCBs.
n Outlook and valuations: Receding negative overhangs; maintain ‘BUY’
We continue to factor in redemption for balance USD 140 mn FCCBs in May 2011 (USD 205 mn including premium), but highlight that the divestment gives sufficient headroom to cover any short fall (~USD 25-50 mn) and reduces investor concerns. We believe, while increasing focus on the formulation business and divestment of non-core assets provide medium-term support to margins, ramp up from the PFE deal in Europe and ROW markets gives strong visibility to growth. We, hence, maintain our TP of INR 1,500 and ‘BUY’/Sector Outperformer’ recommendation/rating on the stock.
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