Ipca Laboratories: Unichem & US scale-up expected to be gradual

21 Dec 2023 , 11:38 AM

Recommendation: Reduce; Target price: Rs 980

 

Analysts of IIFL Capital Services recently met AK Jain, Jt MD & CFO and Harish Kamath, Corp. Counsel & CS of Ipca. Ipca has appointed Pabitra Bhattacharyya (President of its API business) as the MD of Unichem, to drive cost optimisation and market expansion opportunities at Unichem. While Ipca is focusing on reducing Unichem’s logistics/energy costs from 10/7% of revenue resp. (vs 3-3.5% each for Ipca) in near term, market expansion of Unichem’s portfolio to newer markets will be a gradual process over the next 1.5-2yr period. Ipca’s US business is also expected to see only a gradual recovery, with mgmt targeting Rs6.5bn revenue from US formulations in the next 6-7 years (analysts of IIFL Capital Services have assumed Rs2.5bn revenue in 2 years in FY26), with a 40-product portfolio. Although Ipca’s execution in the India market remains strong with 300-400bps outperformance vs IPM, the expected ramp-up in Unichem’s profitability and US market is already built in their estimates. Analysts of IIFL Capital Services find valuations expensive at 29/23x FY25/26 PE. Maintain REDUCE. 

Unichem integration progressing in line with expectations: 

At the time of acquisition, mgmt had guided for Rs18/3bn revenue/Ebitda for Unichem by FY26 but given the strong traction seen in H1FY24, mgmt indicated that Unichem could clock Rs20bn revenue in FY26 (analysts of IIFL Capital Services have assumed Rs21bn). Although mgmt is targeting double-digit top-line growth, Unichem can potentially double its revenue over the next few years (with minimal capex) led by expansion of Unichem’s portfolio to markets such as Australia, NZ, Canada and EU, where Ipca has an established presence. 

Expect gradual recovery in the US business: 

Ipca is set to enter the US market in 1QFY25 after almost a decade, as all of its 3 USFDA facilities are now cleared. It used to clock Rs2.2bn revenue from US Formulations in FY14 and expects to get back to the same level over the next 2-3 years. Ipca has 20 US approved products, out of which 3-4 can be launched in Q1FY25 with no incremental work, while 15-16 products need revalidation of batches. Ipca is targeting to have a portfolio of 40 products in the US that could enable it to clock Rs6.5bn of US revenue in the next 6-7 years. 

Planning to add another 10% reps to India business: 

Mgmt reiterated that Ipca’s India business will continue growing at 1.3-1.5x of IPM growth, led by scale-up in therapies such as Derma, Ophthal, Urology, CNS. After having expanded its India field force by 25% from 5,000 in FY22 to 6,200 in H1FY24, Ipca is planning to add another 700 reps over next few quarters.