IPCA Labs to Acquire Stake in Unichem Labs
(Update 02May2023 is available below. Even though this blog was posted originally on 24Apr2023, I will be continually updating this blog whenever new information is made available on the buyback offer.)
(This
is for information purposes only. This should not be construed as a
recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial
adviser before taking any investment decision. Safe to assume the author has a vested
interest in stocks / investments discussed if any.)
When Unichem Laboratories Limited sold its domestic formulations business to Torrent Pharmaceuticals Limited in November / December 2017, the promoter of Unichem Labs, Mr Prakash Mody, boasted about his company's future expansion plans internationally.
2. To a specific question on business growth and succession planning, Mr Mody back in 2017 said: "We want to unlock value by selling intellectual property. The sixties are the new forties. I'm not worried about succession planning. I've a complete team of professionals and they are capable, under my leadership, to deliver business growth."
3. What Mr Mody meant then was even though he was 65 years old, he was boasting he still had the energy to run the company for another 5 to 10
years -- with the help of professionals even without a suitable succession planning.
(source of the statement: CNBC TV18 video dated
03Nov2017; from 4.40 to 6.32 minutes.)
4. I recall this statement from Prakash Mody, when Unichem today announced it is selling 33.38 percent of promoter stake in the company to Ipca Laboratories Limited.
5. Even though he boasted about running the business for 5 to 10 years, he has now apparently given up on continuing with the day-to-day business operations of Unichem by selling his stake to Ipca Labs.
Today's Transaction
6. Ipca Labs today announced it was acquiring 33.38 percent stake in the equity capital of Unichem Labs, at a price of Rs 440 per share totaling Rs 1,034.06 crore, from Prakash Mody, one of the promoters of Uncihem Labs.
Details of Uncihem's business and its metrics are available in the above press release.
7. Simultaneously, Ipca Labs announced it's making an open offer (public announcement) for acquiring another 26 percent from public shareholders of Unichem Labs at a price of Rs 440 per share totaling Rs 805.44 crore.
8. The acquisition and open offer are subject to the approval of Competition Competition of India or CCI, India's anti-trust regulator, Securities and Exchange Board of India or SEBI, India's capital market regulator, shareholder approval and others.
Unichem Labs stock run-up ahead of open offer
9. Interestingly, in the past one month, Unichem stock rose by 40 percent (from Rs 280 to Rs 390 now), while Nifty Pharma index rose by 6 percent, Nifty Smallcap 100 by 5.6 percent and Nifty 50 grew by 4.7 percent in the same period. In comparison, Ipca Labs stock rose by 5.8 percent in the past one month.
10. Even today, there seemed to be some rumour before official announcment -- Ipca Labs stock today lost 1.7 percent, while Unichem stock rose by 3 percent (official announcement from Uncihem and Ipca came after closure of market hours today).
11. From the price action in the past one month, one could guess there was some leak of the price-sensitive information about the open offer to the market participants. Otherwise, Uncihem stock would not have gained as much as 40 percent in an otherwise sideways market.
12. How has the market sensed the open offer one month before the actual event? There are so many mysteries / doubts about insider trading / information leaks in markets quite often. The case of Ipca Labs' acquisition from Unichem promoter and simultaneous open offer for Unichem Labs seems to be one such case.
Sale of Domestic Formulations Business
13. During November / December 2017, Unichem Labs sold its domestic formulations business to Torrent Pharmaceuticals Ltd for a net consideration (after incidental expenses) of Rs 3,350 crore -- actual net gain for Unichem was Rs 2,520 crore after payment of income tax, capital gains tax and others (data from page 140 of annual report 2017-18).
14. How did Uncihem Labs distribute the net gain of Rs 2,520 crore to its equity shareholders? An amount of Rs 900 crore was distributed to shareholders in Mar2018 via a share buyback and a paltry sum of Rs 33 crore was paid via dividends.
And what had happened to the remaining Rs 1,600 crore surplus cash available from sale of domestic formulations business?
15. At the time of selling the formulations business, the company management specifically stated that they would distribute the surplus cash to shareholders after the Mar2018 buyback -- but nothing of that sort happened in financial year 2018-19.
16. My point is only one-third of the net gain of Rs 2,520 crore was distributed to shareholders and not much explanation was given about the remaining two-thirds of the net gain from the sale.
It's hard for stakeholders to take the statements of promoters at face value -- most of the promoters do not walk the talk.
Valuation of Ipca and Unichem
17. Unichem stock today closed at Rs 390 with a market cap of Rs 2,750 crore, while Ipca Labs stock closed at Rs 826 with a market cap of Rs 20,950 crore.
The
trailing 12-month or TTM price-earning or P/E
ratio of the Unichem Labs is nil (loss-making), its price-to-book or P/B ratio is 1.1 and
its price-to-sales or P/S ratio is 2.1 (all as on 24Apr2023).
The
trailing 12-month or TTM price-earning or P/E
ratio of the Ipca Labs is 40, its price-to-book or P/B ratio is 3.6 and
its price-to-sales or P/S ratio is 3.5 (all as on 24Apr2023).
See the
following screenshots for more on valuation and peer comparison
>
Update 02May2023
19. Justification for offer price of Rs 440 per equity share of Unichem Labs >
20. As detailed in DPS, open offers are a lengthy process. Investors and prospective investors would be better off closely following the timeline of activities till the open offer is completed.
A typical list of activities is in table 1 >
21. As detailed above, the open offer would commence on 16Jun2023 and closes on 30Jun2023. Investors who participate in the open offer can expect to receive the funds in their bank accounts by 14Jul2023.
22. Unichem Labs stock on 02May2023 closed at Rs 380, with a market cap of Rs 2,670 crore; while Ipca Labs closed at Rs 708, with a market cap of Rs 17,960 crore.
(I'll
be updating this blog as and when new developments take place in
relation to the buyback offer -- to comment on business model, profit,
solvency, liquidity, shareholding pattern, MF holdings, whether buyback
from debt, capital allocation optimal, etc.)
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References:
SEBI weblink for Unichem Labs takeover by Ipca Labs (access public announcement, detailed public statement or DPS, etc. at the weblink)
Ipca Labs conference (25Apr2023) call transcript
Unichem Labs Analysis 02Oct2009
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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