Okay , I got your point. Here understanding what we mean by free is important.
Lets say you buy a house of worth Rs 1 Cr/- and there is a cash of Rs 1Cr inside the locker in the house of which you have no control whatsoever . The keys are with some other person (management of the business) and he could do anything he wants with that cash ( he could even burn that in casino) , That we don’t know.
Now would you consider that as buying house for free ?
This cash in the balance sheet looks good like Gold in your house but doesn’t do anything on its own. Moreover the underlying assets that you will be left with you should not forget are loss making so far and of negative book value.
The money Rs 15000/- going into R&D is very trick, it could fetch 100% return on capital ( with amazing drug drug discovery or all could go into drain as well).
The US business you think has some intrinsic value ? The honeymoon is already over there the branded generics companeis like Teva is on the cusp of bankruptcy
The outlook with those businesses are not certain, If it would have been 2011 i would be buying Unichem.
For me the free means the house with Rs 1cr cash inside it which i have full control off.
Think about it as a minority shareholder you had any say on the deal done with Torrent ? then how can you say that you have full ownership of the cash that will be there.
Still as i said if management able to pull off 10% margin from international business then you have a fair deal ( not very attractive deal here) but in todays environment i want margin of safety, don’t want to buy on net net cash. may be 30-50% lower than that.
End of the day its your choice i am very greedy when it comes to value otherwise i love my cash.
Maths has already been well explained by everyone above. For 1200 cr (2700cr mcap less 1500 cr of buyback/ dividend) you are getting the entire international business (thats not just loss making revenues but also most of its plants, some with heavy capex and yet to be ramped up) plus 1500cr of cash to be reinvested back. Agreed the international business is not doing well but what are the possible upsides:
US business: price contraction yet seeing healthy topline growth. Few approved ANDAs yet to be monetized. Whatever you say about US party being over, the industry will stabilize one day, possibly years down the line!
Brazil business will only get better from few more approvals; possibly in 6-9 months as per management on a concall. Economy stabilizing after the recent upheavel
UK business can possibly get better with rampup of assets.
Downside protection:
good asset value as International business most of the plants and rnd centre. Kohlapur and goa yet to be ramped up (so possible topline growth). Worst case scenario 1000cr slump sale basis? just a shade lower than 2x topline; half the multiple of domestic.
1500 cr of cash. I think biosimilars etc is far fetched; in his interview he mentioned of filing more andas. I think money will go over there and that too gradually as it is a process. So in interim you will have interest income. first year 100cr average cash; 7% is 70cr in plain interest!!! and the notional value to protect the mcap (lock and key argument on cash is fine, but nobody aint getting any cash anyways from any company’s balance sheet. Its an argument. the cash is being reinvested by able and conservative management. Do i expect them to generate atleast incremental 50cents per dollar on this cash and answer is yes. so 750 crore of additional mcap).
Businesses do tend to turn around. i am not an expert on exactly when. Management is conservative and possibly in a year or two we can see better profitability from three geographies; aided by rampups.
key risk:
Merger fallout: might result in strong negative sentiment; the stock has had multiyear lows around 200… so 30% dip strong support is not bad… we are in equities, 10% drop or gain doesnt event matter. Thats just a nuisance move! Also, people opposing sale hopefully will find value somewhere and protect my losses. Good thing is deal is kept simple technically, a beautiful execution, so hurdle should be less.
More than pricing pressure; i fear USFDAs observations.
no return on 50% of the cash that would be returned back. a dead holding cost for a few months.
My two cents on the company:
There are globally 1200 pharmaceutical names listed across exchanges with a bar of minimum USD250m market cap. Of these 1200, only 20 trade below book value. Of these 20, 10 are holding companies (hence below book is understandable). 8 are companies like Teva where Debt is 3-8x of market cap (hence insolvency risk reflecting in valuations). There are only 2 companies that are left with below book valuations and no major debt concerns. Unichem is one of them (book value of 4000crs post sale and tax) and the other is some Chinese company (have no idea of whats wrong with that company).
Now, on the comment of investing in complex generics or biosimilars or innovation:
Companies that do such investments trade far above 1x book value. Take SPARC for example (Sun Pharma Advanced Research), it trades at 60x book. Other smaller companies like JB Chemicals, Laurus Labs etc which are of comparable size to Unichem trade at 2-4x book value. Assuming, 1500crs of dividend/buyback, the remainder book value of 2500crs.
Now, on the profits post sale:
I actually think the company may report a loss post sale as Export subsidiaries are profit making but the standalone cost would have no commensurate revenue without India business. However, other loss making companies like Wockhardt (which has investments in generics yet reports loss due to USFDA alert) trade at 3-4x book.
Now Unichem trades at 1.x earnings and has lot of cash. They expect the international business to fetch $100 million, with ROE and ROCE improving because of buy back isn’t it a good opportunity to enter at current prices (344-366)?
What is the business that unichem holds after selling its branded biz to torrent?I too agree with you .The company has market cap of 1800 crore and has received 2500 crore in the dec quarter.I think some more amount is due from torrent.
Unichem has exports to US, EU and emerging markets. Both Formulations and API. They also have API sales in India left behind post sale to Torrent. Yet again, MCap of the company is lower than the book value.
PE is not correct since the domestic business was sold to Torrent Pharma. But yes at these levels its very attractive. The book value per share as on March 31, 2018 itself was Rs. 392.63.
What is your view on Unichem…After the sales, at current market price the cash in the balance sheet covers most part of the market capitalisation… no debt … plus running business
Any reason for such low valuation? What is your outlook? Is it worth investment?
