Ipca Laboratories (Q2 FY13)

Ipca Labs reported better than expected revenue performance in Q2 FY13, with export revenues growing 32% yoy to Rs3.4bn. Domestic growth (+14.7%) was slightly lower than expected but offset by higher sales from the export business especially on account of sharp depreciation in rupee and higher sales from UK. Institutional business too reported 41% growth to Rs1.3bn.

On the flip-side, dip in domestic API business along with implementation of track and trace system in some part of UK continued impacting growth from UK & Russia region. Overall total revenue from formulation grew by 22.9% yoy to Rs6bn and API segment enhanced revenue by 21.3% yoy clocking revenue of Rs1.6bn. The US business grew by 12%, while it reported only ~5-6% growth in constant currency. Modest growth in the US was attributable to the capacity constraint for servicing US business. The 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 FY14 onwards.

At operating front, Ipca’s Q2 FY13 OPM performance was impressive with margin expanding 83bps qoq. Margins expansion remained capped at lower level to 23.2% on the back of higher R&D expenses along with soaring material cost. Additionally, significantly higher other income along with the forex gain of Rs64mn led to a significantly higher growth in reported PAT to Rs1.2bn.

Management expects FY13 revenue growth to be around 18%. We believe now company is well positioned to report better margin as the business mix is expected to improve with Indore SEZ commercialisation. 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 currently for Ipca the risk reward is well balanced and also we don’t expect further expansion in trading multiple. We rate Ipca market performer, with a revised 9- month target price of Rs486.