Ipca Laboratories: Valuations factoring-in too much optimism

13 Nov 2023 , 11:36 AM

The Street seems to have discounted execution risks in Ipca’s Rs15bn acquisition of Unichem and is factoring-in too much of optimism on mgmt’s ability to turnaround Unichem and scale back Ipca’s US business to its historical levels post the recent USFDA clearance of the 3 plants. Analysts of IIFL Securities note that despite Unichem’s revenue growing >30% in H1FY24, Unichem’s Ebitda margins continue to remain paltry at 4-5% implying limited operating leverage in the business. Additionally, Ipca’s erstwhile US product portfolio would have also seen price erosion over the past 8-year period, thereby raising doubts on whether Ipca can ramp-up its US business significantly in the near-term. Despite giving benefit of doubt and assuming that Ipca can increase Unichem’s Ebitda to Rs3.4bn in FY26ii, scale-up its US business to USD30m in 2 years, and improve base margins (ex-Unichem) by 170bps over FY24-26, analysts of IIFL Securities find no margin of safety in Ipca’s current valuations of 29/23x FY25/26 PE. They maintain their REDUCE rating with a TP of Rs930. 

Reiterated target of Rs3bn Ebitda from Unichem in 2 years: 

Unichem acquisition contributed for 2 months in Q2, with revenue/Ebitda of Rs2.85bn/60m. Ipca’s short-term targets for improving Unichem’s profitability include changes in API processing to expand GMs, reduce utility costs by Rs120-140m in FY24, and reign-in logistics costs. Medium-term targets include market expansion opportunities for Unichem’s API/ Formulation products, integration into Ratlam plant to improve cost efficiencies, & improve utilization across Ghaziabad/Goa plants. Analysts of IIFL Securities assume Unichem’s Ebitda to increase from Rs380m in H1FY24 to Rs3.4bn in FY26. 

Ipca’s US product supplies are expected to begin from Q1FY25, given revalidation of batches will take 4-5 months. Mgmt believes that there has not been any significant price erosion in Ipca’s erstwhile US portfolio. With 18 approvals and 26 pending ANDAs (mostly from Pithampur), mgmt is hopeful of ramping-up the US business, which will also be aided by Unichem’s US portfolio of 60-70 ANDAs. Analysts of IIFL Securities assume Ipca’s US sales of USD15/30m in FY25/26. R&D will increase from 2.5% to 4% gradually. 

Analysts of IIFL Securities have already assumed Ipca’s base business Ebitda margins (exUnichem) to expand ~170bps over FY24-26, driven by a consistent 13-14% growth in the India formulations business and 18% growth in the Export formulations led by the comeback of the US business. Although analysts of IIFL Securities see execution risks, they have upgraded FY24-26 Ebitda by 4-9%.