Zydus Lifesciences Shares Plunge 5.9% as Sterling Biotech Share Price Hits Rs 12 Amid Concerns Over Premium Acquisition
Analysts Cautious on Joint Venture’s Strategy as Zydus Expands Into Animal-Free Protein Sector
Sterling Biotech Share Price: Zydus Lifesciences Ltd. faced a significant setback in the stock market, with its shares plummeting 5.9% to Rs 1,109 per share during Monday’s intraday trading on the BSE. This sharp decline comes in the wake of Zydus’ recent strategic partnership with Perfect Day Inc., a Temasek portfolio company, which has led to concerns among analysts regarding the premium valuation of the deal.
Zydus-Perfect Day Partnership: A New Venture in Animal-Free Proteins
Zydus Lifesciences, through its wholly owned subsidiary, has entered into a 50:50 joint venture (JV) with Perfect Day Inc. as part of a strategic acquisition. The deal involves Perfect Day selling its 50% stake in Sterling Biotech Ltd. (SBL) to Zydus, converting SBL into a joint venture equally owned by both companies. SBL, known for producing fermentation-based products like gelatin and Active Pharmaceutical Ingredients (APIs), will now pivot towards the production of animal-free proteins under the new JV.
The joint venture is set to focus on the manufacturing of fermented, animal-free proteins, targeting a growing global market for sustainable, vegan nutrition. A manufacturing facility dedicated to this purpose is planned, aiming to address the rising consumer demand for eco-friendly protein alternatives. This move marks Zydus’ entry into the rapidly expanding animal-free protein sector, catering to consumers who prefer plant-based options or those with lactose intolerance.
Analyst Skepticism Over Premium Valuation
Despite the strategic significance of this acquisition, analysts have expressed caution, particularly regarding the valuation of Sterling Biotech. Japanese brokerage firm Nomura highlighted that SBL has been valued at a 70% premium, with a total valuation of Rs 1,100 crore. Zydus’ acquisition of a 50% stake at Rs 550 crore contrasts sharply with the Rs 640 crore valuation under the Insolvency and Bankruptcy Code (IPC) proceedings.
Sterling Biotech was admitted to the Corporate Insolvency Resolution Process (CIRP) in June 2018, with the National Company Law Tribunal (NCLT) ordering its liquidation in May 2019. In April 2022, Perfect Day emerged as the successful bidder during the e-auction process, acquiring SBL.
Challenges Ahead: Weak Profitability and Low Margins
Nomura’s analysis points out that Sterling Biotech recorded a revenue of Rs 450 crore in FY24, showing a compound annual growth rate (CAGR) of 10% since its revenue bottomed out in FY21. Despite this, the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) stood at Rs 588 crore in FY23, with FY24 figures yet to be disclosed. Nomura’s analysts believe that SBL’s current profitability is weak, given its sluggish revenue growth and low EBITDA margin, leading them to conclude that the acquisition is unlikely to be earnings accretive in the near term.
Strategic Shifts and Future Prospects
Zydus Lifesciences’ decision to acquire Sterling Biotech is seen as a strategic move to enter the animal-free protein market. Analysts believe that Zydus aims to rebuild SBL’s business by leveraging Perfect Day’s expertise in animal-free protein production, combined with Zydus’ manufacturing and commercial capabilities. However, this strategic shift might involve significant changes, including the possible divestment or abandonment of SBL’s existing operations in gelatin and APIs.
Motilal Oswal, another leading brokerage firm, acknowledged the potential benefits of Zydus’ entry into the animal-free protein sector. However, they remain cautious, noting that they await more details on the joint venture’s renewed strategy and planned investments to revitalize SBL’s prospects. The firm also emphasized that while Zydus continues to build a niche product pipeline in the US generics market to sustain growth momentum, the current stock valuation already factors in a 12% earnings CAGR over FY24-26.
Market Reaction and Expert Opinions
At 10:00 AM on Monday, Zydus Lifesciences’ shares were trading 4.04% lower at Rs 1,131 per share, while the BSE Sensex was up 0.64% at 81,607 levels. Despite the decline, analysts from Motilal Oswal maintained a ‘Neutral’ rating on Zydus Lifesciences with a target price of Rs 1,210 per share, while Nomura also kept a ‘Neutral’ rating with a March 2025 target price of Rs 1,020.
Conclusion: Awaiting Clarity on Strategic Execution
As Zydus Lifesciences embarks on this new venture, the market remains cautious, with analysts closely watching the joint venture’s strategic execution. The success of this acquisition will largely depend on Zydus and Perfect Day’s ability to navigate the challenges of integrating SBL’s operations while pivoting towards the high-growth animal-free protein market. Investors and analysts alike await further details on the joint venture’s strategy, which will be crucial in determining the long-term impact of this acquisition on Zydus’ financial performance.
