SHASUN CHEMICALS AND DRUGS -A challenging acquisition in difficult times

Shasun completed the acquisition of Rhodia Pharma’s custom synthesis assets and
shared its plans yesterday at the analyst meet. While this acquisition serves as a good
strategy for Shasun to enter the custom synthesis business, the size of the business and
the quantum of loss can potentially wipe out Shasun’s entire profitability in FY07E.
Management too expects to take two years to turn around this acquisition. This pain of
transition will get aggravated as Shasun’s other areas of focus too are progressing
gradually and require further investments and management attention.

We have revised our consolidated estimates for FY07E down to a net loss of INR 291 mn
from our earlier estimate of a net profit of INR 428 mn. This not only reflects the loss in the
acquired business but also reflects our lowered estimates on the formulations business
where we have still not seen any ANDA filings. We have assumed a break even of Rhodia
operations in FY08E which too might be slightly optimistic given the over capacity in
custom synthesis.
With a net loss in FY07E and a PE of 24.7x on FY08E earnings, the stock looks very
expensive and we thus downgrade our rating from ‘BUY’ to ‘SELL’.

Key Highlights


The cost of acquisition was not disclosed, however, Shasun mentioned that total
investment will be to the tune of USD 30-35 mn over two years including the upfront
cost of acquisition.
The transaction includes UK manufacturing sites at Dudley in England and Annan in
Scotland. The capacity of both the plants put together is 525 Cu. M. Both the plants
are USFDA inspected and approved for many products.
With this Shasun gains access to contract manufacturing technologies like Hydrolytic
Kinetic Resolution, Aromatic Bond Formation and Radical Trifluoromethylation.
Although the transaction includes only acquisition of facilities and not business,
Shasun is confident of retaining the entire client base.
These assets generated sales of USD 72 mn in CY05 incurring USD 11 mn loss at
EBITDA level.
Rhodia Pharma has 14 products in Ph II B and above. Currently, 10 products are
already commercialized generating 35-40% of total sales.
The acquisition currently will be funded through debt and internal accruals, but
Shasun did not rule out the possibility of an equity dilution.



Financials
Year to March FY05 FY06E FY07E FY08E
Revenues (INR mn) 3,252 3,549 7,084 7,865
Rev growth (%) 21.5 9.2 99.6 11.0
EBITDA (INR mn) 639 662 218 836
Net profit (INR mn) 311 336 (291) 194
Shares outstanding (mn) 45.8 48.1 48.1 48.1
EPS (INR) 6.8 7.0 (6.1) 4.0
EPS growth (%) 21.9 2.8 (186.5) (166.7)
PE (x) 14.7 14.3 (16.5) 24.7
EV/EBITDA (x) 8.3 8.0 24.3 6.4
ROE (%) 22.8 20.8 (23.5) 14.4