Ipca Laboratories:: 2QFY2011 Result Update::Angel Broking,

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Ipca Laboratories::  2QFY2011 Result Update





Ipca Labs (Ipca) 2QFY2011 performance was mixed. Though top-line growth
was ahead of estimates, recurring net profit growth disappointed due to OPM
contraction, higher depreciation and tax charges. We remain Neutral on the
stock owing to fair valuations.


Results ahead of expectations: Ipca reported net sales of `514cr (`429cr), up
19.9% and was ahead of our estimates of `487cr driven by the domestic
formulation and generic export segments. On the domestic front, the company
witnessed strong traction in the anti-malarial and pain-management segments,
while generic exports were driven by the tender business and US region. The
company clocked OPM of 22.2% (23.5%), which was below our estimate due to
higher employee and SG&A expenses. Excluding the forex gain, recurring profit
came in at `70cr (`64cr), up 10% yoy impacted by lower OPM, higher
depreciation and tax charges.


Outlook and valuation: We expect net sales to post 18.1% CAGR to Rs2,175cr
and EPS to register 18.7% CAGR to Rs23.1 over FY2010-12, driven by the US
and domestic markets and the API segment. At current levels, the stock is trading
at fair valuations of 16.0x and 12.9x FY2011E and FY2012E earnings,
respectively. We maintain Neutral on the stock.




Concall takeaways
􀂄 On the capex front, the company expects to incur expenses to the tune of
`220cr in FY2011 and `200cr in FY2012 for its formulation plant at Sikkim
and API plant at Ratlam.
􀂄 On the forex front, Ipca has forward cover of US $124mn at 47.8/US$.
􀂄 The company’s facility at the Indore SEZ has received the UK MHRA approval
and expects to receive US FDA approval by 4QFY2011. The company expects
its fixed cost to be recovered with the commencement of sales to the UK
region. The plant is specifically dedicated to cater to the US region.


Recommendation Rationale
Domestic formulations business the cash cow: 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 constitute more than 50% of its domestic formulation sales. Management
has ramp up its field force significantly by 1,000 MRs (30% increase) by adding
three more divisions in the domestic formulation segment, taking the total strength
to nearly 4,000 MRs by end FY2010.
Exports to be the next avenue for growth: On the formulations front, the company
has been increasing its penetration in the regulated markets, viz. 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, anti-malarial segments and tapping new geographies. On the
API front where it is among the low-cost producers, the company is aggressively
pursuing supply tie-ups with the MNC pharma companies.
Indore SEZ approval and tender business to enhance momentum: Ipca is awaiting
US FDA approval for its Indore SEZ. Once approved, the facility would cater to the
US generic market and could clock sales to the tune of Rs300-350cr (19% of its
FY2010 revenues). Further, the company has received approval from the WHO for
its anti-malarial product making it eligible to participate in global tender worth
US $300mn along with three other players.
Valuation: We expect net sales to post 18.1% CAGR to Rs2,175cr and EPS to
register 18.7% CAGR to Rs23.1 over FY2010-12 driven by the US and domestic
markets and the API segment. At current levels, the stock is trading at fair
valuations of 16.0x and 12.9x FY2011E and FY2012E earnings, respectively. We
maintain Neutral on the stock.