Buyback: Boosting sentiments of Ipca investors

B D Narayankar

THERE IS some good news for people who have already invested in Ipca. They can now heave a sigh of relief, as generic drugmaker Ipca Laboratories is considering a share buyback. This will prevent the price of the stock from falling down further in the weak Indian market. And for the new investors, it will be an opportunity to make big money after investing in it now.

With the economic slowdown and global bourses bathed in red, Mumbai-based Ipca had a tough time as the stock lost 43.42 per cent of its value this year. The buyback news will certainly boost investors’ sentiments.
The company will be deciding the buyback and its investment size at a board meeting scheduled on November 1. Ipca decided on the buyback after considering its strong cash reserve position. The firm plans to use a portion of Rs 600 crore in this regard, Ipca executive director AK Jain stated.

“A share buy-back makes sense now as the valuation is low and it may also help (in) boosting shareholder value,” he said.

Ipca shares closed at Rs 383.55 on the Bombay Stock Exchange (BSE) on Friday (October 31), nearly half the Rs 760 per share on January 10, when the stock was at a 52-week high.

Buying back shares from the open market at a premium could help support the stock in a bear run. Promoters in Ipca currently hold 46.7 per cent of the company.

The company’s consolidated net sales have witnessed a CAGR of 17.6 per cent since ’03 to reach Rs 1,091.4 crore in financial year (FY) 08, while net profit posted a CAGR of over 16.8 per cent to Rs 136 crore. This growth has mainly been organic.

The past two quarters have seen a drop in profits (and hence margins) due to (extraordinary) translational losses on foreign currency loans. Ipca is in the process of commercialising its new facilities.

The expanded facilities are likely to result in tax benefits and increase Ipca’s capacity to meet new demand. The company has commenced its formulations business in the US and expects an additional business worth $5 million (Rs 22.5 crore) this year.

Ipca incurred a capex of Rs 140 crore in FY08 to increase existing capacities in India. It has a planned capex of Rs 80 crore and Rs 100 crore for FY09 and FY10, respectively. Ipca is a dividend-paying company with an average dividend payout of 20 per cent of profits. It is likely to maintain this payout ratio in the near future.

The company’s consolidated EPS is Rs 51. It commands a fair valuation compared to similar sized peers. It is likely to log a growth of 18-20 per cent to achieve a turnover of Rs 1,287.8 crore in FY09. Considering its estimated earnings for FY09 and excluding the effect of extraordinary translational losses on forex loans, Ipca is currently trading at an attractive forward P/E of eight, against the current consolidated P/E of 10.5.