Aurobindo: Proceeds from stake sale to beef up cash flows

From being a low-margin active pharmaceutical ingredient (API) manufacturer, Hyderabad-based Aurobindo Pharma is transforming itself into a high-margin formulations player. The company's divestment in its Chinese subsidiary is aimed at this.

Aurobindo Pharma is divesting its 51% stake in Aurobindo (Datong) Bio Pharma to Sinopharm, the largest pharma and healthcare group in China. The overseas firm will infuse more capital into the company, further reducing Aurobindo's stake to 19.5%.

The loss-making Chinese subsidiary produces a derivative of penicillin - most of which is captively consumed by its parent. The written-down value of Aurobindo's investments in China stands at $70 million. In the nine years of its presence in China, Aurobindo's subsidiary has incurred a loss of about $8-10 million annually. It has reported profit only in three years.

The divestment of the non-core unit augurs well for the company, which is growing at a fast pace. While the company has not disclosed the total amount accruing from the stake sale, it would receive the re-payment of its loan given to the subsidiary worth $23 million ( 103.5 crore).

Besides, the divestment will improve the company's annual operating profit by $5-6 million. The reduced stake in the unit will ensure that Aurobindo continues to receive its supply of penicillin - a key antibiotic - at competitive prices. The stock market gave its green signal to the development as the company's stock hit an intra-day high of 1,317 following the announcement.

The company has been building its cash reserves to redeem its FCCBs this fiscal. The proceeds from the stake sale would beef up its cash flows. During FY10, the company had made certain write-offs provisions regarding its operations in China. The stake sale will also enable the company to write them back in this fiscal year.

Points: The divestment in the Chinese unit will improve Aurobindo Pharma's annual operating profit by $5-6 million

The company has been building its cash reserves to redeem its FCCBs this fiscal. The proceeds from the stake sale would beef up its cash flows.