Shares of pharma firm IPCA Labs (IPCA) have fallen 18 percent in 3 sessions after the company announced its plan to acquire a 33.38 percent stake in Unichem Laboratories.
The stake buy will be priced at ₹400 per share (3 percent above Unichem's Monday closing price), aggregating around ₹1,034.06 crores. The company will also buy an additional stake of up to 26 percent through an open offer priced at ₹440 per share (13 percent higher than Unichem's Monday closing).
IPCA Labs has fallen 15 percent just in April so far. It was flat in March and down 5 percent in February. In January, it was up 0.8 percent.
The stock has lost 18 percent in 2023 YTD, witnessing a strong fall in 2 of the 4 months of the current calendar year. Meanwhile, in the last 1 year, it has shed over 25 percent.
Brokerages are not pleased with this acquisition.
Brokerage house Motilal Oswal believes the risk-reward is less favorable towards the acquisition. It has downgraded IPCA to ‘neutral’ and reduced its target price to ₹760, (from ₹940 earlier), indicating an upside of just 3 percent.
While the acquisition would enable IPCA’s re-entry into the US generics market and aid synergy through cross-selling the portfolio in the export market, MOSL believes that increased competition in the oral solids US generics market and no USFDA inspections at Unichem sites since Feb’20 put the outlook for the US generics business at risk.
"While Unichem would add capacity for formulation/API for IPCA, the return ratios would be in check at the consolidated level due to a gradual improvement in Unichem’s profitability. Given an operational loss of ₹60 crore in 9MFY23, considerable efforts are needed toward the product pipeline and cost management," it further noted.
MOSL has cut its FY24/FY25 EPS estimates by 11.7 percent/5 percent to factor in the Unichem acquisition and a subsequent reduction in other income. It has also reduced the PE multiple to 21x (from 24x) due to the utilization of capital toward the high-gestation/low-return generics business and expensive valuations. "We downgrade IPCA to Neutral as the current valuation adequately factors in the earnings upside," MOSL said.
“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 the US market,” Prabhudas Lilladher also noted.
PL has maintained its ‘hold’ rating but reduced its target price to ₹750 (from ₹865 earlier), indicating an upside of just 1 percent.
"We do believe that Ipca has a huge scope to improve its operational efficiencies and potentially scale up operating margins to over 15 percent from the current level of 6-7 percent in the near term. The company has also guided for ₹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 200 bps," it stated.
Another brokerage, ICICI Direct, also believes that at 2.4x TTM FY23 sales, the deal seems a tad costlier given the lower profitability of Unichem's exports-driven business.
