Ipca Laboratories: Export-led volatility to increase post Unichem

5 Oct 2023 , 11:38 AM

Recommendation: Reduce; Target price: 875

 

Analysts of IIFL Capital Services factor in Ipca’s Unichem acquisition into their estimates, following its acquisition of a 52.7% stake in Unichem for Rs15.4bn. Excluding deal-related amortisation expenses, analysts of IIFL Capital Services forecast the deal to be -3.5/+1.3/+4.5% EPS accretive for Ipca for the first three years, assuming Ipca can drive targeted revenue/cost synergies through 12% revenue Cagr for Unichem (vs 3% revenue Cagr over FY19-23) and turnaround in Unichem’s Ebitda margins from -3% to +17% over FY23-26. While analysts of IIFL Capital Services continue to like Ipca’s sustained outperformance in the India Pharma market, the business mix has become inferior now as Unichem increases Ipca’s exposure to inherently low-margin, lowreturns US/Exports business, and hence reported RoE will remain depressed at 10-12% over the next two years. Analysts of IIFL Capital Services FY24-26 EPS is 8-13% below consensus and they maintain their REDUCE rating. 

Analysts of IIFL Capital Services forecast 12% revenue Cagr for Unichem over FY23-26 vs 3% revenue Cagr over FY19-23: 

Unichem’s historical revenue growth has been lacklustre, with its US revenue (58% revenue contribution) remaining flat at USD100mn p.a. over the past 5 years. With Ipca targeting to improve Unichem’s growth trajectory by cross-selling Unichem’s portfolio in markets such as EU/AUNZ and via better utilisation of the manufacturing network of the combined entity, analysts of IIFL Capital Services have assumed Unichem’s revenue to ramp-up from Rs13bn in FY23 to Rs19bn in FY26.

Cost synergies look more achievable than revenue synergies, as Unichem’s employee costs & other expenses are ~600 & 1,000bps higher than those of Ipca. Ipca will target to improve Unichem’s margins through cost and R&D optimisation, by driving operational efficiencies at Unichem’s API plants and by increasing capacity utilisation of Unichem’s Formulation plants including the new Goa plant that is operating at only 25-30% utilisation. Analysts of IIFL Capital Services factor in Unichem’s Ebitda margins to improve from -3% in FY23 (+6.6% in Q1FY24) to +17% in FY26. 

Export-led volatility will further increase for Ipca post the Unichem acquisition: 

FY24 is already expected to be a muted year for Ipca’s Exports business (ex-Unichem), with its API segment sales expected to decline 10-12% and Generic Institutional segment expected to decline 15%. Earnings pressure will further increase over the next few quarters, as Ipca starts consolidating Unichem’s financials. Analysts of IIFL Capital Services have assumed a 7.5 months contribution from Unichem in their FY24 estimates.