Cadila Healthcare (Cadila) announced that it has entered into an agreement to sell its animal healthcare business in India and certain other countries to a consortium led by Multiples Alternate Asset Management. This deal has been valued at Rs29.2bn on debt free and cash free basis which translates into 4.9xEV/Sales and 19.5xEV/EBITDA on FY21 provisional numbers. We believe the valuations are decent and the deal is expected to be EPS neutral. The company will use the proceeds to retire debt in short term and to invest aggressively on biosimilars, vaccines and innovative programs over long term. We believe these investments would have longer gestation period, though COVID-19 vaccine may drive large upside in near term. 

Divestment to help in reducing leverage in near term: Cadila will be selling its animal health business in India and certain other countries along with manufacturing plant at Haridwar for Rs29.2bn. This business had revenue of Rs5.1bn and EBITDA of Rs876mn in FY20 and provisional revenue and EBITDA for FY21 are Rs6bn and Rs1.5bn respectively. The company will retain its animal health business for US and EU which is currently in the development and investment phase. The money will be utilised for debt repayment in near term which will reduce the leverage significantly (net debt to fall below Rs10bn). However, the company plans to aggressively invest in longer gestation period projects like innovation, biosimilars, vaccines, etc. which would take few years to yield results.

Conference call highlights: 1) Focus will be on new growth areas for next decade like specialty, vaccines, biosimilars, etc. and investments for the same would increase, 2) capital gain tax would be ~Rs2bn (25% tax rate on capital gains), hence net proceeds post tax of ~Rs27bn would be utilised for repaying debt in near term which would reduce net debt to below Rs10bn, 3) leverage can be increased in future for investments in new growth areas, 4) investment for COVID-19 vaccine is complete at the moment and additional investment may be required to augment capacity as per the demand, 5) preparing for next wave of biosimilars for FY25 onwards opportunities, 6) net fixed assets of the business sold is ~Rs1bn, 7) the deal is expected to conclude in 90 days subject to regulatory approvals.