Multi Baggers

Ipca Laboratories Limited

Company Overview:

Formed in 1949, IPCA Laboratories Ltd. is a vertically integrated leading pharmaceutical company manufacturing both formulations & APIs and having a strong thrust on exports. IPCA manufactures over 350 formulations and 80 APIs for various therapeutic segments. The company exports products to over 110 countries globally including Africa, Asia, Australia, Europe and the US. IPCA has 7 production units and is the world's largest manufacturer and supplier for 12 APIs. These are produced right from the basic stage at manufacturing facilities endorsed by the world's most discerning drug regulatory authorities like USFDA, UK-MHRA, EDQM-Europe, WHO-Geneva and many more. IPCA is a therapy leader in India for anti-malarials with a market-share of over 34 percent with a fast expanding presence in the international market as well. The company also leads in disease modifying anti-rheumatic drugs (DMARDs).

Financial Analysis:

IPCA reported better than expected Q2FY14 numbers with topline growth of 10 percent YoY at Rs 834 crs driven by exports which grew by 11 percent YoY. Exports contributed 62.1 percent while Domestic business contributed 37.9 percent to the revenues. EBITDA at Rs.234Crs was up 31 percentYoY and 37 percent QoQ. The highlight of the quarter is the highest ever Gross Profit Margin of 66.5 percent (up 660bps) primarily on the back of product mix change and favorable currency. EBITDA Margin improved spectacularly by 440bps to 27.7 percent against 23.3 percent last quarter (Last 9 quarter average - 22 percent). This along with reduction in interest expenditure during the quarter resulted in Net profit of Rs 162 crs up 50 percent QoQ and 34.5 percent YoY.

APIs (~23 percent of the turnover) registered a healthy growth of 26 percent whereas formulations (~77 percent of the turnover) on the other hand grew by just 6 percent YoY on account of postponement of revenue of ~Rs.40Crs from global tenders and lower Anti-malarial sales due to shift in focus to higher margin products. IPCA filed one ANDA during the quarter taking total ANDA filings to 36 and it received one product approval taking the total product approval to 16 this quarter.

Positives:

We like the stock because of the following reasons -

Focus on high margin product segments: IPCA has been successful in changing its business focus to the high-margin chronic and lifestyle segments from the low-margin anti-malarial segment. The chronic and lifestyle segments, comprising CVS, anti-diabetics, pain-management, CNS and dermatology products, now constitute more than 50 percent of the company's domestic formulation sales.

USFDA Approval to Indore SEZ plant: IPCA's Indore facility has received USFDA clearance to manufacture oral formulations. With USFDA approval in place, the company is expecting to launch 6-7 products in the next 15-18 months, commencing from Q4FY14. It is expected to generate around Rs.80-100Crs in FY15E.

Exports to be the growth engine: IPCA has been increasing its penetration in regulated markets, like Europe and US, by expanding the list of generic drugs backed by its own API. In the emerging and semi-regulated markets, IPCA plans to focus on building brands in the CVS, CNS, pain-management and anti-malarial segments along with tapping new geographies. Exports are expected to grow at a CAGR of 17 percent over FY2013-15E.

New marketing tie ups: Apart from its existing marketing tie-ups (3 partners currently), IPCA is in the process of signing agreements with two new partners. This will take the total number of products under tie-ups up from ~30 to more than 75. Driven by these tie-ups, we believe IPCA's will post USD 107 mn revenues in FY16E with a CAGR of 47 percent.

Valuations:

Going forward, incremental US revenues from the newly commercialized Indore SEZ, robust exports, steady tender segment, improving product mix and the increasing traction in the domestic formulations business will remain key drivers for revenue growth. Improving operating leverage will lead to expansion in EBITDTA margins over FY13-16E and improving free cash flow generation. The management has increased the revenue growth guidance from 16-18 percent to 18-20 percent and ~200-250 bps improvement in earlier EBITDA margins guidance of 20-22 percent.

At the CMP of Rs 755.60, the stock trades at P/E of 24.9xFY13, 18.2xFY14E and 15.8xFY15E, with the EPS of 30.3, 41.4 & 47.7 respectively. The valuation though a trifle rich is based on the positive view of the market on export oriented pharma units and the expected growth in the coming days. Consistency in the performance, strong revenue visibility and incremental earning guidance by the management make us positive on the stock. We recommend buying IPCA Laboratories Ltd. with a target price of Rs 1000.