Ipca Laboratories (Ipca) has begun its offer to buy back up to 10% of its paid-up share capital. The shares would be bought from the open market at a maximum price of Rs600 per share.
Currently, the size of the company’s equity is 2.5 crore shares. Assuming an average buy-back price of Rs400 per share, we estimate that the company would buy back 0.15 crore shares from the public shareholders, causing the equity to decline by 6% to 2.4 crore shares.
Since the buy-back is being done through the open market, the promoters would not need to tender their shares. Consequently, the promoter’s shareholding would rise from the current 45.8% to 48.7%.
We expect Ipca to generate cash of ~Rs172 crore from its operations in FY2009. After accounting for the incremental capital expenditure (capex) and working capital requirements, we believe that the company would be left with a free cash flow of ~Rs45-50 crore, which could be used to fund the buy-back.
The company may need to raise an incremental Rs10-15 crore in short-term debt to fund the buy-back.
We expect the buy-back to have a positive effect on the company’s return on capital employed and earnings. Though the reduction in the equity base would boost the earnings per share (EPS), the outflow of cash to fund the buy-back would reduce the profitability of the company.
We present the possible changes in our earnings estimates in various scenarios, depending on the quantum of the buy-back. However, we maintain our previous estimates until the completion of the buy-back.
At the current market price of Rs336, Ipca is discounting its FY2009E earnings by 6.5x and its FY2010E earnings by 4.0x. We retain our positive stance on the stock and maintain our BUY call with a price target of Rs664.