Why Ipca Labs Share Price is Falling

When I opened today's edition of The Economic Times, a particular headline about an acquisition made me sit up and take notice: 'Ipca Labs set to acquire Unichem Labs promoter's stake for over Rs 10 billion'.

Mergers and acquisitions have been in immense focus, ever since the pandemic. In 2022 alone, big ticket acquisitions like Twitter's acquisition by Elon Musk, NDTV's takeover by the Adani group, among others, topped the headlines.

A mint report notes that M&A deal value in the pharma sector hit a record high in 2022. What has suddenly changed? This time around, domestic companies are buying chunks of smaller companies and even acquiring some multinational firms.

The recent acquisition by Ipca Labs is a big one. The share price of Ipca Labs has fallen around 17% in the past one year and the company is constantly looking for growth opportunities.

Will this acquisition turn the tables? Let's first take a look at the reasons why Ipca Labs share price is falling and then look at its future prospects.

Why Ipca Labs share price is falling

#1 Expensive acquisition

Ipca Laboratories on Monday said it has entered into a definitive share purchase agreement to acquire Unichem Laboratories promoter's stake for Rs 10.3 billion (bn). It'll be an all cash deal. The company will acquire around 23.5 million (m) shares at a price of Rs 440 per share.

The company will also make an open offer to the shareholders of Unichem Labs to acquire up to 26% stake at a price of Rs 440 per share. The company will fund this deal from its retained earnings.

Now according to market experts, this deal is a little expensive as Unichem Labs is yet to overcome challenges and turn profitable.

Though this acquisition will give Ipca Labs a second go in the US generics market, this deal can have a significant outgo from its retained earnings.

#2 Volatility in raw material prices

The company is involved in the API business. It needs a raw material named Artemisinin for some of its formulations.

The company claims there are only a couple of other manufacturers who are suppliers qualified by the World Health Organization (WHO) in this segment.

Artemisinin is a seasonal product and contracts are signed for the entire year at higher prices. Its price varies a lot due to its agri-commodity nature.

At present, the Artemisinin segment is running in losses and is expected to remain tepid for the next 1-2 quarters. This is another reason why the share price trend is negative.

A hard look at the Unichem deal and the numbers

In recent quarters, Ipca Labs' US business has suffered after the drug regulator put import bans on three of its manufacturing sites.

If the Unichem Labs deal does go through, it could possibly strengthen the company's manufacturing and R&D footprint. Unichem has multiple manufacturing facilities.

This could turn out to be fruitful for Unichem Labs shareholders too as the company is currently going through a rough patch. For the nine months ended December 2022, the company has reported a net loss of Rs 1.6 bn.

Exports constitute over 80% of Unichem's business. There too, client concentration in the US business is over 55%.

Shares of the company were under pressure due to price erosion in the US market and fluctuations in raw material prices.

This was until March 2023. Since then, shares have rallied sharply. This could be due to the anticipation of this deal or some other reason.

Coming to the valuations of the deal, brokerages have highlighted expensive valuations as a concern while also pointing out that prospects look grim for the near term given increased competition in the US market and rising regulatory risks.

As a result, shares of Ipca Labs fell over 10% on an intraday basis in early trade today.

Strong growth prospects

In its concall, Ipca Labs said the fourth quarter of FY23 is expected to be strong at 10-12% growth from branded promotional market, generic formulations, and API business.

Notably, the management also highlighted that its API business is expected to double in the medium term. Five new products are in the pipeline, with two in the clinical stage.

The API company is undertaking a capex of around Rs 2 bn in the coming fiscal, including routine maintenance capex, with an additional Rs 1.5 bn for a biotech project.

Also, the thing that works as a moat for Ipca is its backward integration. Several of its manufacturing facilities use their own formulation, which helps with cost efficiency.

How Ipca Labs share price has performed recently

In early trade today, Ipca Labs share price tumbled over 5% to reach a low of Rs 797 on the BSE against its previous close of Rs 826.

As the session progressed, shares of Ipca Labs fell further to hit a low of Rs 739, which is also its new 52-week low price.

Ipca Labs has a 52-week high of Rs 1,035 touched on 4 May 2022.

In the past one year, shares of the company have fallen around 17%.

Have a look at the table below to compare Ipca Labs with its peers:

Comparative Analysis

Company	IPCA Labs	Alembic Pharma	Laurus Labs	Granules India
ROE (%)	17.9	10.1	28.1	17.5
ROCE (%)	20.4	11.2	26.0	17.4
Latest EPS (Rs)	20.7	11.4	17.1	21.0
TTM PE (x)	39.9	47.6	17.5	14.2
TTM Price to book (x)	3.6	2.1	4.1	2.7
Dividend yield (%)	0.5	1.8	0.7	0.5
Industry PE	33.7
Industry PB	3.5

Data Source: Equitymaster, Ace Equity

About Ipca Labs

Ipca Labs was founded by a group of businessmen and medical professionals in 1949. In 1975, Premchand Godha, along with two other co-promoters, took over its management.

It's a fully integrated Indian pharma company, manufacturing over 350 formulations and over 80 APIs. At present, exports comprise nearly 50% of its revenue.

Some of its major therapeutic segments include cardiovascular and antidiabetics, pain management, anti-malarial, etc.

To know more, check out IPCA Labs financial factsheet and its latest quarterly results.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...