Ipca Laboratories: Consistent O/P in India, Recovery in Exports

19 Jul 2023 , 10:36 AM

Recommendation: Add; Target price: Rs 760

 

Ipca’s FY23 AR highlights its consistent outperformance in India formulations (1.4x of IPM growth over FY20-23), recovery in Export formulations (up 10% in FY23) aided by strong rebound in CIS/EU markets, and flat API sales impacted due to Azido impurities. With addition of 1500 MRs and 4 new divisions for the domestic business over the past 2 years, analysts of IIFL Capital Services expect Ipca’s strong volume-led outperformance to continue with 13% India formulations sales Cagr over FY23-26. Export segment growth will continue to normalize, with geo-political/supply chain issues behind us and will be aided by Dewas API capacity addition. While analysts of IIFL Capital Services expect 12/24/32% revenue/Ebitda/EPS Cagr over FY23-26 and continue to appreciate Ipca’s strong execution in the domestic market, company’s anticipated margin normalisation has been delayed for quite some time and Unichem acquisition increases exposure to low-margin & low-returns Exports business, which could lead to consensus earnings downgrades. Maintain ADD.

Consistently outperforming IPM driven by volume-led growth:

Ipca’s India formulations business clocked 15% Cagr over FY20-23, driven by both volume/price hikes, as Ipca’s volume/price/N.I. grew 6/6/3% Cagr vs IPM’s 2/5/3% Cagr resp. Despite high base, Zerodol brand has grown at 22/11% sales/volume Cagr over FY20-23. With Ipca adding 1500 MRs over the past 2 years and improving productivity of the expanded team, analysts of IIFL Capital Services expect double-digit growth trajectory to sustain in Ipca’s India business. 

Export formulations recovered in FY23 and grew 10% YoY, driven by strong recovery in both CIS/EU markets which grew 40/14% in FY23. With geo-political issues in CIS markets behind us and de-risking of the UK business via change in distribution model, analysts of IIFL Capital Services expect Ipca’s Export formulations to clock 13% Cagr over FY23-26. API segment sales should also rebound given the new Dewas API plant is now fully functional and impurity issues related to Sartans seems over.

Analysts of IIFL Capital Services like Ipca’s solid franchise, except the bulking-up of exports through Unichem acquisition: 

While analysts of IIFL Capital Services continue to appreciate Ipca’s strong execution in the domestic market, Unichem acquisition for Rs18bn (59% stake) would increase Ipca’s exposure to inherently low-margin & low-returns US/Exports business. Margin pressures in FY23 has already led to contraction in Ipca’s RoE to historical lows of 8-9% and return ratios will continue to remain depressed following the large acquisition of Unichem.