Ipca Labs plunges 16% in two days; hits 3-year low on Unichem stake buy

The acquisition will allow Ipca to re-enter US formulation generic market, however at 2.3x sales, as acquisition cost is expensive, given challenges and uncertainty associated with US market.

Shares of Ipca Laboratories hit a three-year low at Rs 692, as they slipped another 7 per cent on the BSE in Wednesday’s intra-day trade on the back of heavy volumes. The stock was trading at its lowest level since April 2020.

In past two trading sessions, the stock of pharmaceutical company has plunged 16 per cent after the company's board of directors approved an acquisition of 33.38 per cent stake in Unichem Laboratories for Rs 1,034 crore from one of its promoter shareholders. With the past two days’ decline, the stock price of Ipca Labs has corrected 33 per cent from its 52-week high of Rs 1,035.30, touched on May 4, 2022.
 

Ipca Labs said it has entered into a definitive share purchase agreement for acquisition of 23.5 million equity shares, constituting 33.38 per cent of the paid up equity share capital of Unichem Laboratories at a price of Rs 440 per equity share.

This proposed acquisition is subject to approval from the Competition Commission of India. Ipca will also have to make mandatory open offer to the tune of 26 per cent at Rs 440 per share. This will result in additional cash outflow of Rs 800 crore. The transaction is likely to be completed over the next 4-6 months. The deal - including the open offer when fully subscribed - will take its stake in Unichem to 60 per cent.

The acquisition will allow Ipca to re-enter US formulation generic market, however at 2.3x sales, as acquisition cost is expensive in our view given challenges and uncertainty associated with US market, said analysts at Prabhudas Liladher in its event update.

Analyst believes that Ipca has a huge scope to improve its operational efficiencies and potentially scale up OPM to +15 per cent from current level of 6-7 per cent in near term. The company has also guided for Rs 300 crore annual EBITDA from Unichem business within 2 years of taking management control. Even after factoring this, acquisition cost works out to be at 10x EV/EBITDA and largely EPS neutral in FY25E; however RoE/RoCE will be dilutive by ~200bps. Historically Ipca has done few acquisitions, but with size like Unichem will test management bandwidth and execution capabilities, the brokerage firm said. It maintains ‘hold’ rating on the stock with revised target price of Rs 750 per share.

Analysts at Motilal Oswal Financial Services cut their FY24/FY25 EPS estimates by 11.7 per cent/5 per cent to factor in Unichem’s operations and a reduction in other income due to the use of cash to fund the Unichem acquisition.

“We reduce the PE multiple from 24x to 21x 12M forward earnings to factor in capital allocation toward the low-ROCE generics business (compared to branded generics business) and expensive valuation. Accordingly, we arrive at a target price of Rs 760 (Rs 940 earlier). We downgrade IPCA to Neutral as the current valuation adequately factors in the earnings upside,” the brokerage firm said in company update.