Ipca Laboratories Ltd. share price target

We launch coverage with a BUY rating and a price target of Rs. 870, arrived at by applying 20x multiple to its EPS Rs. 43.6 for the year ending March- 20E. Our target price suggests a return of 18% from the Current Market Price (CMP) of Rs. 735 over the next 12 months.

ICICI Securities Ltd | Retail Equity Research Revenues grew 14% YoY to | 859 crore (I-direct estimate: | 814 crore) due to 12% growth in domestic formulations to | 383 crore (Idirect estimate: | 402 crore) and 17% growth in export formulations to | 273 crore (I-direct estimate: | 227 crore). API sales grew 16% YoY to | 192 crore (I-direct estimate: | 172 crore) EBITDA margins improved 406 bps to 18.8% YoY (I-direct estimate: 16.0%) mainly due to 1.7% decline in other expenditure. EBITDA increased 46% YoY to |162 crore (I-direct estimate: | 130 crore)...

IPCA expects at least 200-250bp EBITDA margin improvement (~18-18.5 in FY19E v/s a normalized margin of 16-16.5% in FY18E). This will be primarily driven by 1) India business growth of ~14-16%, 2) a significant reduction in remediation cost from ~INR500-550m in FY18E (~1.6% of sales) to ~INR40-70m in FY19E, 3) a reduction in manpower by ~600 (~200 in marketing and ~400 in manufacturing), 4) commencement of the WHO tender business from FY19E, and 5) other cost rationalization efforts to lower SG&A and other expenses. We expect further margin improvement in FY20 on the back of ramp-up of the US business and approval of injectables for the tender business.

IPCA Labs posted results lower than expected for 2QFY2018 mainly on the OPM and net profit front. In sales, the company posted sales of `864cr, a yoy de-growth of 2.3% v/s. `884cr for 2QFY2017, but mostly in line with the expected sales of `870cr. On OPM front, the company posted EBITDA of 17.2% (v/s. 20.5% expected) v/s. 15.3% in 2QFY201..

IPCA's Q2 EBITDA grew 16% YoY (6x QoQ), which was 33% ahead of our estimate. This was led by (1) strong recovery in India business (up 3% YoY/44% QoQ), (2) ~335 bps YoY improvement in gross margin with better product mix (lower anti-malaria business in India)

PAT grew 92% YoY to | 97 crore (I-direct estimate: | 53 crore) mainly due to a strong operational performance Exports formulations main catalyst for growth but challenges await Export formulations (31% of FY17 turnover) have grown at 6.3% CAGR in FY11-17. Growth in exports formulations was on the back of growth in both international generics and international branded formulations. The international anti-malarial institutional business has also contributed substantially to overall exports growth. US traction will take more time...

Domestic business (ex anti-malaria) delivers strong growth: India formulation sales grew 5% YoY to ~INR4.2b. According to management, domestic branded business (ex anti-malaria) grew ~23-24% YoY. IPCA lost ~INR350-400m of sales v/s 2QFY17 due to lower Malaria-related sales. Management expects growth to bounce back to low-to-mid-teens in coming quarters, led by channel re-filling. International generic revenue fell ~18% YoY, mainly on weak UK/flat US business. Institutional business reported revenue of INR220m, as ~INR150 of sales got deferred to 3QFY18....

Q1 EBITDA margin at 3% was at multi-year low due to negative operating leverage led by 17% YoY decline in domestic formulations (on GST transition) and 14% YoY decline in export formulations (USFDA issues & UK currency impact).

IPCA Labs posted results lower than expected for 1QFY2018 mainly on the OPM front, which lead the company to report losses during the period. In sales, the company posted sales of `713cr, a yoy de-growth of 16.6%, but mostly in-line with the expected `700cr. On EBITDA front, the company posted EBITDA of 3.0% (v/s. 8.0% expected) v/s. 14.0..

ICICI Securities Ltd | Retail Equity Research Revenues declined 17% YoY to | 713 crore (I-direct estimate: | 741 crore) mainly due to GST transition impact in domestic formulations....