Eris Lifesciences: Why mutual funds are hiking stake continuously?

Between 2023 and 2024, Eris Lifesciences made five major acquisitions, boosting its topline from Rs 306 crore to Rs 551 crore.

Mutual funds have been steadily increasing their stake in this promising pharma stock, with the latest addition being Franklin Templeton. On July 15, the fund raised its stake in Eris Lifesciences by acquiring an additional 0.8 percent equity, valued at Rs 109 crore. This brings Franklin Templeton's total stake to 2.26 percent, up from 1.46 percent. Another notable investor, HDFC Small Cap Fund, has also increased its stake from 4.57 percent in September 2023 to 7.76 percent in June 2024.

In fact, since March 2023, collective stake of mutual funds in Eris Lifesciences has risen significantly from 10 percent to 16.23 percent as of June 2024. The stock price has doubled over the period. But that’s hardly anything to write home about given that in the preceding six years, since its listing in June 2017, the stock went absolutely nowhere.

Does the rally in the stock have more steam left? The optimism surrounding Eris Lifesciences this time around appears to be the potential pay-off coming from the slew of acquisitions the company has effected over the past few years.

Acquired growth

Between 2023 and 2024, Eris Lifesciences made five major acquisitions, boosting its topline from Rs 306 crore to Rs 551 crore. These strategic acquisitions have diversified and scaled up the company's existing portfolio, enhancing its presence in key therapies like nephrology and dermatology in the domestic market. Analysts see these moves as major growth drivers for the drugmaker.

"The company has multiple growth levers such as broad-based offerings in the derma segment, opportunities in the cardiometabolic market with patent expirations, and benefits of operating leverage as revenue scales up from these acquisitions," Prabhudas Lilladher noted.

In 2024, Eris Lifesciences acquired the injectables portfolio from Swiss Parenterals and Biocon Biologics. This follows its previous acquisitions of derma brands from Oaknet Healthcare, Glenmark Pharma, and Dr. Reddy’s Laboratories last year.

Mitesh Shah, a research analyst at Nirmal Bang Institutional Equities, believes these acquisitions will strengthen Eris’ presence in the fast-growing cosmetic dermatology segment, which is outpacing the overall dermatology market. Analysts at Nirmal Bang Institutional Equities predict that the dermatology segment could contribute up to 15 percent of Eris' total revenue.

Also Read | Is Eris Lifesciences on the verge of a turnaround?

Through FY24, Eris Lifesciences has shown a consistent rise in net profit while maintaining profit margins around 30 percent, despite the acquisitions. Buoyed by the recent fruitful acquisitions, Prabhudas Lilladher expects Eris' margins to sustain at over 35 percent as revenue scales up from the recently acquired businesses currently operating at suboptimal profitability.

Growth guidance

Eris Lifesciences has also rolled out a guidance of 12-14 percent organic growth in its domestic formulations business, further bolstering investor sentiment. Several brokerages, including Prabhudas Lilladher, have chosen Eris as their top pick within the pharma segment due to its strong growth potential.

In addition to the acquisitions, Eris Lifesciences' higher reliance on the domestic pharma market, a segment expected to drive growth for pharma companies in the coming years, also works in its favor. Currently, the company’s return ratios are at a historic low. Last fiscal, its ROE stood at 16 percent, compared to its 10-year average of 25 percent. If the pay-back from acquisitions pan out as expected, the financial complexion of the company will most likely change to justify its P/e of 35.7.

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