Ipca Labs (Q1 FY13)

CMP Rs407, Target Rs460, Upside 13%

• Ipca reported 2% lower than our expected revenue growth, which is attributable to lower than expected pick up in export business. The company witnessed revenue growth of 19.7% yoy to Rs6.3bn. The growth was mainly driven by domestic formulation and export API segment which grew by 18.6% and 57.9% yoy respectively. Slowing tender business and new packaging (of Track & Trace system) norm took a toll on export formulation. Overall total revenue from formulation grew by 13.4% yoy to Rs4.5bn and API segment grew by 38.8% yoy clocking revenue of Rs1.8bn.
• In exports, generic formulation sales missed our expectation on the back of lower contribution from UK & Russia due to implementation of Track & Trace system impacting export business by Rs350 to 450mn. Growth for South Africa was 15% yoy to Rs50mn, Australia, New Zealand grew by 6%, UK business was flat at Rs600mn, Promotional business grew by 7% to Rs450mn and Russia witnessed revenues decline by 34% to Rs135mn. High margin US segment grew by only 14% at Rs475mn. Modest growth was due to capacity constraint as company will start manufacturing from Indore SEZ post site transfer and approval of products by US FDA. Meaningful contribution from this site will only flow in from Q4 FY13. Institutional business also slowed down this quarter; it witnessed growth of 13% yoy. At institutional business front, the company has got approval for Artimisinin + Amodiaquine recently and will start applying for tenders in next 3 months. This product has market potential of Rs1.5-2.0bn. IPCA will be the first generic supplier and second manufacturer after Sanofi
• Ipca surprised us at margin front by reporting margin of 22.3%; improvement of 439 bps yoy and 245 qoq is notable. EBITDA margin improvement largely led by lower employee and other expenses along with improved business mix (higher contribution of Domestic Business). But, Operating margin did not percolate to Net level at the same rate due to incremental depreciation of Indore SEZ and other higher fixed cost. Net margin improved by 360 bps yoy and 97 bps qoq to 13.9%
• We believe now company is well positioned to report better margin as the business mix is expected to improve with Indore SEZ approval. Ipca will start manufacturing from Indore SEZ post site transfer and approval of products which is expected in 2-3 months. Meaningful contribution from this site will only come in from Q4 FY13. The company expects peak sales of ~ RS4bn from this unit. Currently the total ANDA filings are 25 of which 12 are commercialized. 8-10 new ANDA filings are planned for FY13.
• Ipca has consistently grown above 20% in the last 5 years. We expect robust performance to continue. Ipca has a strong franchise in Indian branded business coupled with high margin exports. We expect 19.4% CAGR in revenues and Adjusted PAT CAGR of 21.5%. We believe Ipca is currently attractively valued as we expect expansion in trading multiple. We maintain our BUY rating with a revised 9- month target price of Rs460.

Results Table