Shares of Zydus Lifesciences plummeted 5.90 per cent at Rs 1,109 per share on the BSE in Monday’s intraday deals. This comes after the company via its wholly owned subsidiary formed a strategic partnership with Perfect Day Inc, a Temasek portfolio company. As part of the deal, Perfect Day will sell its 50 percent stake in Sterling Biotech (SBL) to Zydus.
The acquisition will convert Sterling Biotech into a 50:50 joint venture (JV) between Zydus and Perfect Day, with equal board representation. SBL currently produces fermentation-based products like gelatin and APIs, however, the joint venture aims to focus on animal-free protein production.
Despite the acquisition effort, analysts remained largely unimpressed as the Japanese brokerage firm Nomura noted SBL is valued at a 70 per cent premium at Rs 1,100 crore with 50 per cent stake valued at Rs 550 crore, compared to the valuation of Rs 640 crore paid under Insolvency and Bankruptcy Code (IPC)proceedings.
SBL was admitted to the Corporate Insolvency Resolution Process (CIRP) in June 2018, and the National Company Law Tribunal (NCLT) ordered its liquidation in May 2019. In April 2022, Perfect Day emerged as the successful bidder in the e-auction process.
The acquired entity recorded a revenue of Rs 450 crore in FY24, with sales bottoming out in FY21 and since then has recorded a compound annual growth rate (CAGR) of 10 per cent. The company recorded Ebitda of Rs 588 crore in FY23, while FY24 is not disclosed, Nomura said.
“We think SBL’s current profitability is weak given its weak revenue growth and low Ebitda margin. Therefore, the acquisition is not likely to be earnings accretive in the near term,” the brokerage added.
Analysts believe that Zydus intends to rebuild the business at SBL by developing animal-free proteins and the company’s existing operations can be rationalised. The new JV intends to combine the current expertise of Perfect Day in producing animal-free protein with Zydus’ manufacturing and commercial expertise
Further, analysts added that the company’s statement indicates that a large part of the existing operations in gelatin and APIs may be abandoned or divested.
This acquisition marks Zydus Lifesciences’ entry into the animal-free protein sector, catering to those preferring plant-based options or with lactose intolerance.
While on the positives, those at Motilal Oswal said that this acquisition marks Zydus Lifesciences’ entry into the animal-free protein sector, catering to those preferring plant-based options or with lactose intolerance.
The brokerage added it awaits details on the JV’s renewed strategy and planned investments to revitalise SBL’s prospects, given its existing fermentation-based APIs, including oncology products, and Perfect Day’s two years of operational control.
“Zydus Life continues to build a niche product pipeline in the US generics market to sustain its growth momentum. That said, the valuation adequately factors in a 12 per cent earnings CAGR over FY24-26,” analysts at Motilal Oswal wrote in a note.
The brokerage maintained its ‘Neutral’ call with a target price of Rs 1,210 per share.
Similarly, Nomura also has a ‘Neutral’ rating on the stock with a March 2025 target price of Rs 1,020 a piece.
At 10:00 AM: the shares of the company were trading 4.04 per cent lower at Rs 1,131 per share. By comparison the BSE Sensex was up 0.64 per cent at 81,607 levels.
First Published: Aug 26 2024 | 10:19 AM IST
