ICICIdirect has upgraded Cipla to 'Buy' with price target of Rs 750.
Cipla recently entered into an agreement to acquire two US-based companies, InvaGen Pharmaceuticals and Exelan Pharmaceuticals. These companies are owned by the promoters of the Hetero group. The transaction is valued at USD 550 million and is an all-cash deal.
The combined revenues of these two companies in CY14 were about USD 200 million (USD 225 million trailing twelve months June 2015) with EBITDA margins of almost 25%. Its revenues grew at approx. 20% CAGR over the last three years. As per the company, the deal is EPS accretive from the first year of consolidation.
Commenting on the investment rationale, the stock broker said, ''At approx. 2.4 times trailing twelve months June 2015 sales, we believe the deal is fair and a long term strategic fit for Cipla. The enlarging of the US franchisee augurs well for the company not only from the point of view of business but also from a currency point of view as it will bring down the contribution from Africa and rest of the world markets (that are witnessing currency headwinds) from almost 40% in FY15. This proposed acquisition will also strengthen Cipla's transformation from back-end to front-end and that too in the US as till now the company was acquiring the front-end businesses in some noncore geographies."
"According to the management, the acquisition is EPS accretive from the first year itself and will be funded via internal accruals and debts. Cipla's balance sheet and operating cash flows are strong enough to assume additional debt and service the same. However, the recent Form 483 issued on InvaGen's plants would be a key concern that should be watched. We have revised our target price taking into account about 6% accretion in the expected FY17 earning. Our new target price is Rs 750 i.e. 22 times the expected FY17 earnings per share of Rs 34.2. We upgrade our rating to Buy," it added
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