The Hindu Business Line : Emami’s Zandu acquisition

Emami’s acquisition of a 27.51 per cent equity stake in ayurvedic pharma company - Zandu Pharmaceutical Works may hold good business potential given that Zandu’s product portfolio fits well with Emami’s in several respects.

However, information available till date suggests that the buyout, which will be followed by an open offer for an additional 20 per cent stake, may turn out to be an expensive one for Emami. Though the company has not disclosed the acquisition price, reports place the acquisition price anywhere between Rs 7,300 and Rs 8,000 per share of Zandu Pharma. Though this is not out of sync with Zandu Pharma’s market prices, the valuation factored into this price appears stiff.

A price of Rs 7,300-8,000 per share would value Zandu Pharma at anywhere between Rs 588 crore and Rs 645 crore. That is between 3 and 3.5 times the target company’s annual sales (Rs 200 crore), even factoring in consolidated numbers.

Based on Zandu’s consolidated earnings per share of about Rs 250 (annualised on nine months numbers), an offer price of Rs 7,300-8,000 would value the company at between 29-32 times its trailing earnings. This premium may not be warranted given the relatively small size of Zandu’s operations in the FMCG space. Emami itself trades at about 23 times its trailing earnings. The buyout may also entail equity dilution for Emami’s investors, as the latter has recently lined up a private placement, possibly to fund this buy.

product portfolio

But valuation apart, Zandu’s product portfolio does offer considerable synergies for Emami to leverage on. With products such as Boroplus antiseptic cream, Navratna cooling oil, Sona Chandi Chyawanprash and Fair & Handsome with a herbal tilt in its portfolio, Emami may be in a position to add to its market shares with the addition of Zandu’s products (Chyawanprash, pain balm), positioned on a strong ayurvedic plank.

Zandu has managed a steady growth in both sales and profits over the past five years with healthy operating profit margins of 16-18 per cent.

That there are not too many profitable FMCG businesses on the block in the domestic market may also have swung the deal for Zandu.

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