By AltG Innovation Centre On Behalf Of Poornima Vardhan And Taponeel Mukherjee
Nirma, a household name in India renowned for its detergent soap, has embarked on a transformative journey into the pharmaceutical industry. In a monumental deal, the conglomerate has sealed an agreement to acquire 75% of Glenmark Life Sciences (GLS) for a staggering $680 million, valuing the company at approximately $900 million—equivalent to GLS's current public market capitalization. This strategic move not only signifies Nirma's diversification but also opens doors to the high-growth world of healthcare.
Investment Potential Of Nirma's Glenmark Life Sciences Deal
At the current valuation of $900 million and a P/E ratio of 15.26, Nirma anticipates a seven-year return on invested capital (ROIC) of 14% from its investment in Glenmark. This is an impressive 200 basis points higher than the SENSEX return of approximately 12% over the past decade (from 2013 to 2023). However, Nirma has exciting opportunities to earn even higher returns.
P/E Multiple Increase:
Assuming a consistent earnings growth rate of 14% over the next five years, any increase in the P/E multiple from the current 15.26 to 20, 25, or 35 would yield substantial returns for Nirma. Specifically, Nirma could expect returns of 18.5%, 22.34%, and 28.36%, respectively. It's worth noting that GLS operates as a stable business with predictable cash flows, making a significant change in the P/E multiple challenging to achieve without substantial growth.
Roll-up Strategy: To unlock the full potential of its investment in GLS, Nirma should consider a roll-up strategy. This approach involves acquiring multiple smaller brands within the same industry and consolidating them under one umbrella, leading to cost-saving synergies and increased bargaining power. Roll-ups have the potential to generate value through "Multiple Arbitrage" and by sharing fixed costs across businesses. The key lies in creating significant operating leverage through scale, which can drive exceptional performance.
Earnings Growth Opportunities:
GLS has outlined two major growth channels it is currently pursuing:
CDMO Business Expansion: GLS aims to grow its Contract Development and Manufacturing Organization (CDMO) business, which currently accounts for 7% of its revenues. The Indian CDMO market, valued at USD billion in 2022, is projected to reach USD billion by 2028, growing at a CAGR of 14.0% during this period. Nirma can substantially boost GLS's earnings growth by capitalizing on this high-growth and specialized market segment.
Complex Molecule Development: GLS is also investing heavily in developing new complex molecules to target niche ailments. By leveraging this innovation and combining it with prudent cost measures, such as improving the cash conversion cycle and adding leverage to the balance sheet, Nirma can further enhance GLS's earnings growth.
Higher Earnings Growth Scenarios:
Suppose we maintain the current P/E multiple while achieving earnings growth rates of 16% and 18%, compared to the current CAGR of 14%. In this scenario, Nirma could expect seven-year returns on its GLS investment of 16% and 18%, respectively. These figures translate to approximately 400 and 600 basis points higher returns than the SENSEX—an enticing prospect for the conglomerate.
In summary, Nirma's acquisition of Glenmark Life Sciences marks a bold and astute capital allocation decision. Beyond the immediate financial benefits, it opens the door wide to the ever-thriving healthcare sector, one of the world's most rapidly expanding industries. As Nirma aims to fortify its presence within the pharmaceutical domain, it stands poised to unleash formidable value through meticulous strategic foresight and harnessing GLS's inherent strengths.
Notes:
Any reference to "returns" above means "Return On Invested Capital" (ROIC)
All returns are in INR terms
Conversion Rate Assumed: 1 USD = INR 83