IPCA Labs shares: Unichem acquisition expensive, earnings dilutive in near term, says Motilal Oswal Securities

With Unichem Laboratories, IPCA Laboratories is set to re-enter the US generics market. But Unichem’s near-term performance would be earnings and return ratio dilutive for IPCA, said Motilal Oswal Securities. This is weighing on the stock.

IPCA has entered into a definitive share purchase agreement to acquire 2.35 crore shares, a 33.3 per cent stake in Unichem from one of the promoters at Rs 440 per share, aggregating to Rs 1,034 crore.

The transaction will be funded through IPCA’s retained earnings. Subsequently, IPCA Labs will make an open offer to acquire up to 26 per cent stake at Rs 440 per share, aggregating to Rs 800 crore. This is against Unichem's Rs 386.80 closing price for Monday. The transaction is subject to approval from the Competition Commission of India (CCI).

Motilal Oswal Securities said the acquisition is expensive, given increased competition in the US generics oral solids space, rising regulatory risks, strong efforts needed to turnaround Unichem, and the valuation of 2.3 times EV/sales on trailing 12-month basis

"We believe Unichem’s near-term performance would be earnings/return ratio dilutive, given Unichem’s operational losses (Rs 60.30 crore for 9MFY23) and a sharp reduction in IPCA’s other income (Rs 120 crore expected in FY23) in FY24 due to the acquisition funding," it said.

The stock took a beating on Tuesday morening falling over 10 per cent in early deals. Shares of Unichem were up 1.16 per cent at Rs 391.30.

Unichem manufactures and markets a large basket of pharmaceutical formulations as branded generics and generics in several countries, including USA/Europe. It has formulation manufacturing facilities in Goa, Ghaziabad, and Baddi. The API facilities are located at Roha, Pithampur and Kolhapur. Overall, the formulation capacity is about 1,330 crore tablets per annum.

Unichem delivered a 4.8 per cent sales compounded annually to Rs 1,300 crore over FY20-22. From an operational loss of Rs 50.80 crore in FY20, Unichem delivered Ebitda of Rs 71.7 crore and 5.6 per cent Ebitda margin in FY22. From a loss of Rs 56 crore in FY22, it delivered PAT of Rs 35.7 crore

Geography-wise, about 58 per cent of FY22 Unichem's sales came from the US generics market. About 37 ANDAs have been approved till date for Unichem Labs.

"We expect a 30 per cent earnings CAGR for IPCA over FY23-25, led by a steady outperformance in the DF segment, a ramp-up in API sales and lower operational costs. We value IPCA at 24 times 12-month forward earnings to arrive at a target price of Rs 940. We have a Buy rating on the stock," Motilal Oswal said.

That said, the brokerage said it will have better clarity about the integration of Unichem with IPCA in the concall.

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