Eris Lifesciences, despite hitting a 52-week low on Friday, is likely to be headed for a strong upside after the recent acquisition, suggests a number of brokerage firms. The pharma company announced the acquisition of nine dermatology brands from Dr Reddy’s Laboratories
In an exchange filing, Eris Lifesciences said that it will acquire part of the dermatology portfolio of Dr Reddy’s Laboratories including nine trademarks along with their applicable line extension for a consideration of Rs 275 crore.
The transaction helps augment and expand the cosmetic dermatology business of the company by way of expansion in the product offerings and the transaction is to stand completed on or before March 31, 2023. The transaction is intended for Indian business, the filing added.
Shares of Eris Lifesciences dropped more than 2 per cent to Rs 570 on Friday, hitting its new-52 week low. The scrip had settled at Rs 583.80 on Thursday. The counter has dropped about 10 per cent in the last one month, while the stock is down 15 per cent in the last six months.
Following the acquisition, brokerage firms remain positive on Eris Lifesciences. They are suggesting investors buy the stock, seeing an upside potential of more than 40 per cent.
Eris Lifesciences announced the acquisition of nine cosmetic dermatology brands from Dr Reddy’s at 5.5x P/S of FY23 expected revenue of Rs 50 crore. The company believes it is well placed to grow these brands at 15-20 per cent over the next three years. The deal is entirely funded by debt at a borrowing cost of 8-8.5 per cent, said Nirmal Bang Institutional Equities.
The acquisition would strengthen Eris’s presence in the fast-growing cosmetic dermatology segment and would propel it to become the third largest player in its dermatology-covered market with a market share of about 7 per cent, it said.
“The acquisition is in line with the company’s strategy to look for brands that are a strategic fit for Eris and fill the gap in existing therapy areas. We like Eris due to its pure domestic play, specialty focus, robust financials, healthy balance sheet and high return ratios,” Nirmal Bang added with a buy rating and a target price of Rs 804, suggesting a 41 per cent upside.
“The acquisition of nine brands from Dr. Reddy’s Labs is the third deal in the dermatology space over the past 12 months. The valuation in terms of EV/sales stands at 5.4x/4.8x for FY23/FY24. This is higher than its earlier acquisitions. We expect the deal to be earnings neutral over the medium term,” said Motilal Oswal.
Although enhancing the derma portfolio is a step in the positive direction, increased leverage could slightly dilute the ROCE over the medium term. It values Eris Lifesciences at 19x 12-month forward earnings to arrive at a price target of Rs 710 and reiterate its buy rating on the stock, it said.
Eris has multiple growth levers such as broad-based offerings in the derma segment, opportunities in cardiometabolic market with patent expirations and benefits of operating leverage, as revenue scales up from these acquisitions which are currently operating at sub-optimal profitability, said Prabhudas Lilladher with a target price of Rs 780 with a buy tag.
Post the acquisition Eris would rank third in its covered dermatology market with a 7 per cent market share, which bodes well. The growth prospects of the other business remain unchanged and overall. The financials currently do not include the numbers of acquired brands as we await further clarity on this, said Mirae Asset with a buy rating and target price of Rs 771.
Also read: Rail Vikas Nigam shares zoom 86% in six months; how long for Rs 100 mark?
Also read: HPCL, BPCL, IOC, ONGC, Oil India: Brent slips below $75 level. How will oil stocks perform?
