AstraZeneca India –Improving Fundamentals + Delisting support

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Category
NameAstraZeneca Pharma India
Type of ReportFirst Recommendation
Report DateFeb 10, 2016
Price on Report DateRs. 1194
Current Market CapRs. 2985 Cr
ViewBuy
Indicative Target Price*Rs. 1700-1800

Company Background: AstraZeneca Pharma India (AstraZeneca India) was established in 1979 and is headquartered at Bengaluru, Karnataka. AstraZeneca India’s more than 90% revenues come from manufacturing and marketing its parent product in India. AstraZeneca India is a debt free company with 75% ownership held by AstraZeneca Plc (through AstraZeneca Pharma Sweden).

Investment arguments

1)  Strong Existing Product Basket: AstraZeneca India has strong brands portfolio with more than 50 products in India across 7 segments in India –Cardiovascular, Diabetes, Oncology, Respiratory & Inflammation, Infection, Local Anesthesia and Maternal Healthcare. Some of its major brands that are leaders in their category includes Meronem (Infection), Seloken XL (Cardio), Crestor (Cardio), Arimidex (Oncology), Zoladex (Oncology), Neksium (Gastro) and most recently Brilinta (Cardio) and Forxiga (Diabetes).

2)  New Products Introduction from Global Portfolio gives Visibility: Over the last 10 years, AstraZeneca has been regularly launching products from its global portfolio in India. In recent years, the launch and marketing focus has accelerated as seen from:

  • Launch of Brilinta, a cholesterol control drug that became #1 brand within 29 months. The company is further expanding the reach of this product.
  • Launch of Forxiga, an innovative novel drug launched has triple benefit of HbA1c Control, Weight Loss and Blood Pressure reduction.
  • Expanding the market for other recently launched products Onglyza (sexagliptin / diabetes), Kombiglyze (sexagliptin combination / diabetes) and Symbicort
  • Marketing tie-up for new brand Riax with Dr Reddy. Riax will be similar to Kombiglyze that is marketed by AstraZeneca alone.
  • Marketing tie-up for new brand Axcer with Sun Pharma. Axcer will be similar to Brilianta that is marketed by AstraZeneca alone.

AstraZeneca’s accelerating activity in India, its global product basket and research pipeline provides excellent long term visibility in India.

3)  Recent Results Suggests Strong Traction: AstraZeneca’s India business is one of the smallest among prominent foreign firms, but the company has one of the highest growth rates. In 9mFY16, the company revenues increased by 16% YoY with the 3QFY16 quarter clocking a growth of 33% YoY. Going by the current run-rate, the company should achieve enough sales where it could see significant improvement in profits.

4)  Delisting subject to SEBI Approval: AstraZeneca Pharma AB, the promoter of AstraZeneca Pharma India Ltd. who currently holds 75% in the company made a third attempt for voluntary delisting with the floor price of Rs. 875. However, two minority shareholders filed a petition against the delisting and SAT directed SEBI to complete investigation by 11Mar2016 and pass an appropriate order on Merit. If the awaited SEBI order gives a go-ahead to the promoters for delisting, the floor price will cushion the downside and the promoter’s eagerness to delisting as seen from its third attempt may provide immediate sizable gains.

To better understand the entire delisting episode of AstraZeneca, please refer the table below:

Below two technical factors point at a potential better discovery price if SEBI approves the delisting:

a)     Very recently, ICICI prudential mutual fund has acquired nearly 7% stake through multiple block in AstraZeneca Pharma India Ltd at a price of Rs. 1150-1175. Being a sole largest non-promoter shareholder, the tender price of ICICI Prudential (if delisting goes through) will be crucial for the success of delisting.

The acquisition by ICICI prudential at Rs. 1150-1175 may help in better price discovery if the delisting goes through.

b)    Recently Fulford, another MNC Pharma company, got delisted at Rs 2400 per share against its floor price of Rs.701.  Though it is not necessary for AstraZeneca promoter to pay such high premium but looking at Indian business growth rate, strong pipeline of products introductions and eagerness to delist as seen from its 3rd attempt, the possibility of delisting at significant premium to floor price cannot be ruled out.

Considering the business improvement and a cushion added by delisting possibility, AstraZeneca provides good upside opportunity with protected downside and fits the classic case of —- “Heads, I win; Tails, I don’t lose much”

Key risks:

1. SEBI not allowing the delisting to go through.

2. Even if SEBI allows Delisting to go through, the delisting can fail due to non-acceptance of discover price or less than required number of shares being tendered in the delisting process.

3. Offer for Sale raises Corporate Governance Flag: The Company did an OFS in May2013 where all the buyers who participated were mainly through P-notes. It raises a suspicion that the buyer may have been connected to the promoters.

 


Dhruvesh Sanghvi is a Research Analyst registered with SEBI having registration No: INH000000875.
Definitions of Rating system:
1. Explanation of Type of Report 
  • Fresh Recommendation Reports: These reports are first time initiation reports on the concerned stock. Usually these reports are followed by updates on the same.
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DISCLOSURES by RESEARCH ANALYST UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014 is as under: 
• Introduction: Prospero Tree Financial Services is an independent equity research proprietorship firm of Mr Dhruvesh Sanghvi.
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1. Neither Prospero Tree Financial Services, its associates, its Research analysts hold any position in the subject company. However, Dhruvesh Sanghvi holds position in the subject company.
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1. The Research Analyst has not served as an officer, director, or employee of the subject company.
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