These are four reasons why the street is sulking over the IPCA-Unichem deal

The deal has been done at around 2.5 times financial year 2022 price-to-sales, compared to expectations of 1.5 times sales, giving an impression that IPCA may have overpaid for the deal.

Unichem's results appear to be sluggish. For the first nine months of 2023, Unichem Laboratories had a revenue of Rs 974.3 crore, an operating loss of Rs 28.64 crore and a net loss of Rs 157.96 crore.

Even for financial year 2022, the company reported a 4 percent drop in net profit and a 200 basis points erosion in EBITDA margin.

The company had returned to profitability in financial year 2021 from a loss financial year 2020.

IPCA may get access to the US business but that will be margin dilutive. Unichem only operates its international business currently after selling its domestic business to Torrent Pharma in 2017 for Rs 3,600 crore.

55 percent of Unichem's sales in financial year 2022 came from the US market. However, the street is questioning whether IPCA can successfully run the US business, considering its three facilities - the API plant in Ratlam, the formulations plant in Madhya Pradesh, and the Piparia plant in Silvassa, are under an import alert since 2015.

IPCA is funding the entire deal via retained earnings. Retained earnings are the amount of profit a company has left over after paying all its direct costs, indirect costs, income taxes and its dividends to shareholders.

Brokerage firm Incred believes that it continues to see growth pressures in IPCA's legacy business and these growth pressures often push companies to make value-destructive acquisitions.

"IPCA shares trade at 30.7x our unrevised FY24 core earnings estimate, a valuation we believe is too high to sustain," the note said. Incred has a reduce rating on IPCA as its own 30 percent plus earnings growth estimate for IPCA could be at risk.

Shares of IPCA Labs are trading 10.2 percent lower at Rs 742.15 and at a 52-week low.