Aurobindo Pharma has decided to divest a 51 per cent stake in wholly-owned Chinese subsidiary, Aurobindo (Datong) Bio-Pharma Company (ADBPL) to China-based Sinopharm.
ADBPL manufactures 6APA, a downstream product of Pencillin-G and other fermentation products, used primarily by Aurobindo Pharma India. Sinopharm, which will be acquiring the shares through its subsidiary, would further infuse capital into the company to enhance its shareholding to 80.5 per cent. This would leave Aurobindo's shareholding in the company at a strategic 19.5 per cent, thus ensuring it a supply of raw materials at competitive prices.
After the stake sale, Sinopharm Group would be relocating the manufacturing unit, according to government regulations, to enhance capacity and reduce cost of production.
While deal valuations haven't been disclosed, industry sources peg it at about $50 million (Rs 227 crore).
This seems fairly reasonable as the China business was loss-making. ADBPL had made losses of about Rs 35 crore on a turnover of Rs 195 crore in fiscal 2010.
High volatility in Pencillin G prices and increased anti-dumping charges too may have influenced Aurobindo's decision to divest stakes.
According to the deal agreement, Aurobindo's loan of about $23 million (Rs 105 crore) to ADBPL will also be paid in its entirety. Divesting stake in the Chinese loss-making subsidiary therefore promises to add to the company's cash flows and margins.
Selling the majority stake in the China subsidiary is also in line with the company's long-term growth plan of focussing on formulations business instead of APIs.
The formulations business now accounts for little more than half its revenues and is touted to be its growth driver; its contribution was just about 11 per cent in FY05.
Interestingly, this isn't the first such divestment by the company. In late 2006, Aurobindo Pharma had divested its entire stake in another Chinese loss-making subsidiary, Aurobindo Tongling (Datong) Pharmaceutical Company. The share price closed flat on Tuesday at Rs 1,300.