I had earliest posted about torrent pharmaceuticals here and initiated a small position. One of the exist criteria mentioned in that post was the balance sheet getting weaker and exposing the company to leverage risks. Recently the company has acquired the some of the brands from Elder Pharma for domestic and Bangaladesh market. Company is paying around 2000cr towards this transaction. Based on what I read in some of the reports the company is paying around 5X sales and this seems to be an expensive acquisition to me.
Also, around 1100 sales and marketing personnel are coming on board whereas none of the assets are being transferred. Elder would continue to hold the assets and supply to Torrent for next 3 years or so. Management has clearly indicated that this acquisition will not be EPS accretive for 3 years. Torrent is likely to fund this acquisition through internal accruals and debt. Given the current reserves and the debt to equity ratio of the company, it is likely to stretch the balance sheet and push the debt to equity above one which is beyond my comfort range. Also, this acquisition would mean that either they would not be able to invest capital in their own line of business for expansion or they are likely to make more debt.
Company has already sent a postal ballot to increase their debt limit from the current 3000cr to 5000cr. Given these developments, I recommend selling this stock and book short term profits, due to the following reasons
- Over leveraged balance sheet exposing the company to leverage risks and interest rate risks
- Lower net margins and possibly lower net profit growth due to higher interest outgo
- Other risks that are common to acquisition like synergy, vision etc.
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