A recent report by Kotak Institutional Equities suggests that if Torrent Pharma or Dr. Reddy’s Laboratories were to acquire Cipla Ltd, it could lead to medium-term earnings per share (EPS) dilution for both companies. Despite the ability of the pharmaceutical giants to secure the necessary funds through equity raises and substantial debt accrual, the potential acquisition may have a negative impact on their financial performance.
The report highlights various aspects of the expected acquisition, including portfolio overlap, funding sources, possible synergies, and the net EPS impact. Assuming the deal takes place at the current market price, the buyer would require approximately $7.3 billion to acquire Cipla’s promoters’ stake and complete the open offer. This would involve a significant equity infusion and debt accrual for both Torrent Pharma and Dr. Reddy’s.
In a base-case scenario, assuming a 100% subscription to the open offer and a 5% synergy-led EBITDA boost, Kotak Institutional Equities predicts a 7% and 4% EPS dilution in FY2025E for Torrent Pharma and Dr. Reddy’s, respectively, if either of them successfully acquires Cipla.
The report also highlights the limited portfolio overlap between the companies, with complementary strengths in different therapeutic segments. Furthermore, the international overlap is minimal, suggesting that significant synergies may not be realized through the acquisition.
Despite Dr. Reddy’s being the larger company, Torrent Pharma has certain advantages due to its higher promoter shareholding and stake in Torrent Power. The involvement of promoters in day-to-day operations is also more active in Torrent Pharma, potentially aiding in smoother integration.
Kotak Institutional Equities maintains a “reduce” rating on Torrent Pharma and Dr. Reddy’s but maintains an “add” rating on Cipla. The outcome of this potential acquisition will likely depend on various factors, including the deal price and the strategies of the acquiring company.
Sources:
– Kotak Institutional Equities Report
