Ipca Laboratories: Capital allocation concerns and inferior biz mix

26 Apr 2023 , 11:11 AM

Recommendation: Add

Target Price: Rs 720

Although management is targeting revenue/cost synergies to ramp-up Unichem’s revenue/EBITDA margins from Rs12 billion/-6% to Rs18 billion/+17% (Rs3 billion EBITDA) over the next 2 years, the deal is still expensively valued at ~10-11x FY26 EBITDA, leaving little room for disappointments if management is unable to execute an operational turnaround of Unichem’s business. Given that Ipca would need to raise Rs10-12 billion of debt to fund the acquisition, analysts at IIFL Capital Services estimate the deal to be -3%/+0%/+3% EPS-accretive over FY24-26, considering best-case scenarios. With an inferior business mix now, they have cut their target PER multiple on Ipca from ~22x to ~19x, to arrive at a revised Target Price of Rs720 (versus Rs840 earlier).

Unichem’s revenue growth has been lackluster

At 2% CAGR over FY19-23, with its US revenue (58% revenue contribution) remaining flat at USD100 million p.a. over the past 5 years, Unichem has 76 ANDA filings and 44 commercialized products in US, with top-10 products accounting for 70% of US revenue. Management is looking to commercialize another 10-12 products in the US. Facility inspections would be a key risk, as Unichem’s plants (3 Forms/3 APIs) were last inspected by USFDA in 2020.

Cost synergies look more achievable than revenue synergies

Management aims to increase Unichem’s revenue from Rs12 billion to Rs18 billon over the next 2 years, to be driven by utilizing Ipca’s backward-integrated manufacturing capacities to augment Unichem’s MS and by cross-selling its portfolio in markets such as EU & AUNZ. Analysts at IIFL Capital Services believe cost synergies are more achievable, since Ipca would target to improve operational efficiencies at Unichem’s API plants and Unichem’s employee costs/other expenses are ~600/1000 basis points higher versus Ipca.

EPS accretion of -3%/+0%/+3% over FY24-26

In a best case scenario of 10% revenue CAGR for the acquired portfolio and 17% EBITDA margins by FY26, EPS accretion could be -3%/+0%/+3% over FY24-26. Given limited accretion from the deal and an inferior business mix now, analysts at IIFL Capital Services have maintained their view that the acquisition does not make much strategic sense and Ipca would have been better-placed had they committed this growth capital to secularly-growing India market.