Moneycontrol Pro Panorama | Pricey bets and side-effects for investors

Acquisitions, mergers and its side-effects on investors.

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Shares of Ipca Laboratories slumped 8 percent on Tuesday in early trading after the company decided to acquire a large stake in Unichem Laboratories and launch an open offer for its public shareholders. If successful, Ipca will part with Rs 1,839.5 crore and gain control of Unichem.

On the face of it, Ipca may seem to be paying a reasonable price. Unichem is valued at 2.5 times its trailing FY23 revenues. But dig deep into Unichem’s numbers and the valuation becomes difficult to justify.

Unichem is primarily an export-dependent company. About half of its revenues are derived from the US alone, which is facing intense competition and price erosion. It made an operating loss in the nine months to December 2023. The FY22 profit margin of 9 percent is way below that of Ipca.

Yet for Ipca, Unichem provides a way out of the current logjam for its exports business. Three of Ipca’s manufacturing facilities are under import alert issued by the US FDA, restricting its North American business. Unichem’s plants face no such hurdles. Moreover, Unichem has a large research and development facility which Ipca can leverage.

Still, the acquisition goes against the current narrative on the Street. Due to competitive pressures, the US generic drug business is less valuable in the current environment. Also, amid headwinds faced by the US business, Ipca has stepped up its focus on the domestic market and has guided for steady improvement in profitability. With the Unichem acquisition, that may no longer be possible in the near term.

“We believe Unichem’s near-term performance would be earnings/return ratio dilutive, given Unichem’s operational losses (in 9M FY23) and a sharp reduction in Ipca’s other income in FY24 due to the acquisition funding,” analysts at Motilal Oswal Financial Services said in a note.

Another company that is receiving mixed reviews is Mankind Pharma. The company has built a formidable India business focusing on smaller cities and towns. It has gained notable market share in key therapeutic areas and is outperforming the Indian pharmaceutical market. However, as Mankind tries to climb the value chain and increase its presence in large metros, the company faces competition from large drug companies.

Moreover, valuations are pricey, warns our research team. “It (the IPO) is pricey, compared to the peer set. With the exception of Eris Life Science, the valuation multiple is nearly at par with companies performing at similar or better levels. As the company is foraying into newer areas of therapies, particularly chronic, there could be execution hiccups,” write Anubhav Sahu and Lekha Badlani-Jhamnani. You can read their analysis here.

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R Sree RamMoneycontrol Pro