Lyka Labs acquisition by Ipca Laboratories could open strong growth opportunities

Lyka Labs stock was locked in an upper circuit of 5 percent at Rs 141.75 intraday on November 25. Ipca Laboratories was down Rs 30 at Rs 2,030 at 11.40 am.

Acquisition synergy 

The management of Ipca sees the formulations segment as one of the key growth drivers, with the domestic market providing the lion’s share.

“An impressive performance of covered therapy areas like pain (up 33 percent ex Covid), cardiovascular (up 13 percent), anti-bacterials (up 37 percent), cough and cold (up 95 percent) as of quarter ending September 2021, could enable Ipca Labs to clock a strong double digit growth in the domestic formulations segment for FY22”, said a report by securities firm Sharekhan.

This acquisition is expected to provide Ipca inroads into the lyophilized injectables business in India and rest of the world, which is the key area of operation for Lyka Labs, added Sharekhan. Lyophilized injectables are an alternative to oral solid dosages of drugs.

“The acquisition will help the management’s plans to enter into the new international market for new product lines providing wider market access”, said Manoj Dalmia, founder and director of Proficient Equities Limited.

Additionally, access to manufacturing facilities will help cut costs and improve profitability, he said.

Ipca Labs does not have any direct business in lyophilized injectables, also known as freeze-dried injectables, a process in which water is removed from a product that is then frozen and placed under vacuum to increase shelf life of perishable products, enabling ease of transport.

Lyka Labs, which has manufacturing facility in Ankleshwar, Gujarat, is also expected to gain from Ipca’s marketing expertise in the branded generic formulations business in Southeast Asia, Middle East, Africa and Latin America where it does not have a presence.

Ipca Laboratories has a strong presence in exports markets, which constitute 52 percent of its revenue.

Financial snapshot 

Lyka Labs reported an after-tax loss of Rs 55.4 crore and Rs 14.5 crore in financial years 2020 and 2021, respectively.

In the six months ended September 30, 2021, Lyka Labs reported an after-tax profit of Rs 49.5 crore on revenue of Rs 109.9 crore. The marked improvement in performance bodes well both for Lyka Labs as well as Ipca.

Ipca reported sales of Rs 1,530 crore in the quarter ended September, up 14 percent year-on-year and down 2 percent quarter-on-quarter.

Earnings before interest, tax, depreciation and amortization (EBITDA), a key measure of profitability, was Rs 346 crore, up 1 percent from Rs 343 crore reported in the same period last year. On a sequential basis, EBITDA was lower by 16 percent because of higher costs of raw materials, employees and other expenses.

Net profit for the quarter was down 5 percent YoY to Rs 252 crore and lower 18 percent QoQ from Rs 307 crore. It had a gross margin of 64.8 percent for the quarter compared to 67.5 percent for the corresponding quarter last year and 65.1 percent reported in the first quarter of financial year 2022.

Capacity expansion 

Ipca Laboratories has lined up ambitious capital expenditure of about Rs 400 crore over the next three-four years. The company is adding a new plant in Dewas for increasing its active pharmaceutical ingredient (API) production, which is likely to come online by the first quarter of the next financial year and would increase capacity by 25 percent.

The company is also expanding capacity at its existing plant in Ratlam, which will become operational after regulatory compliances by December. This will bring in incremental capacity of 10 percent for the company.

Outlook 

“The expected improvement in the formulation business and increased opportunities in the API space and additional business from the institutional segment indicate strong earnings potential for the company,” said Sharekhan.

Near-term challenges for the company include inflationary pressures on raw materials and logistics costs, inability to pass on the increase in costs to the customers and higher inventory in the key markets of Europe.

Near-term growth potential seems to be moderate for Ipca Laboratories but the long-term growth levers are intact and the acquisition of Lyka Labs will likely open strong opportunities, added Sharekhan.

Ipca stock is trading at a valuation of 24.3x and 20.8x its estimated earnings per share for the financial year 2022 and financial year 2023, respectively.

Given the long-term growth levers, the brokerage retains a “buy” recommendation on the stock with a price target of Rs 2,675.