IPCA Labs stock hits valuation hurdle on Unichem stake acquisition

Improving growth and expanding margins in competitive US market will be key challenges

The IPCA Laboratories stock fell 10.22 per cent on Tuesday and hit a 52-week low as the Street reacted negatively to its 33 per cent stake acquisition in Unichem Laboratories (Unichem) for Rs 1,034 crore. The acquisition from one of Unichem’s promoters at Rs 440 per share – a 14 per cent premium to Monday’s closing price – will be followed by an open offer for an additional 26 per cent.

The company will fund the equity purchase and open offer (Rs 800 crore) through internal accruals. The deal – including the open offer when fully subscribed – will take its stake in Unichem to 60 per cent. The deal values Mumbai-based Unichem, which has six facilities across the country, at just over Rs 3,000 crore.

The acquisition is expected to help IPCA expand its presence in the US, where it has been bogged down by compliance issues after the US Food and Drug Administration (FDA) imposed a ban on imports from three of its facilities in 2015.

Though Unichem has facilities that are compliant with US drug regulations, brokerages believe the price paid – 2.3 times enterprise value to sales on a trailing-twelve-months basis – was steep. Analysts led by Tushar Manudhane of Motilal Oswal Research say the acquisition was expensive, given the competition in the US generics oral solids space, rising regulatory risks, and efforts needed to turn the company around.

Given the premium valuations, the Unichem stock reacted positively to the deal, and rose about 1 per cent.

The IPCA management, however, believes that the lack of product overlaps, opportunities for synergy across portfolio both in formulations and active pharmaceutical ingredients, USFDA compliant facilities, and wider geographic market for both companies make it a good buy.

Given Unichem’s portfolio in the US market, where it has been gaining market share in key products, sales to rest of the world markets, improving utilisation levels and cost optimisation, the company could generate revenue of Rs 1,800 crore and operating profit of Rs 300 crore over the next two years, the IPCA management believes.

In FY22, the company posted a profit of Rs 33 crore on revenue of Rs 1,269 crore. In the nine months ended December (9MFY23), however, it posted an operating loss of Rs 58 crore and net loss of Rs 158 crore. Revenue in 9MFY23 stood at Rs 940 crore, a growth of 4.6 per cent.

In light of the operational losses (in FY23) and integration challenges as well as lower other income, the acquisition could weigh on IPCA’s earnings in the near term. The stock has underperformed rivals over the past year and fell 26 per cent over the period. With multiple challenges in the US market on account of price erosion, a predominantly generic portfolio, uncertainty on execution and expensive valuation of the acquisition, the stock could remain under pressure in the near term.