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 USD 23 million 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 Rs 2.5 billion 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 (USD 10 million as on FY2010). Moreover, cash flows from the deal including the pay back of debt of around USD 23 million 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 Rs 1,565.
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