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Ipca Laboratories Ltd |
Cost overhang dents profitability |
ACCUMULATE
CMP: Rs 312 Target Price: Rs 336
n IPCA’s Q3FY11 results were below expectations with a) Revenues at Rs4.6bn (est. Rs4.8bn), b) EBITDA at Rs880mn (est. Rs1bn) and c) PAT at Rs640mn (est. Rs684mn)
n Revenue growth was driven by 12% growth in domestic formulations (est. 20% growth) and a robust 33% growth in the exports formulations (est. 32% growth)
n Addition to the field force has impacted short term profitability but long term growth visibility remains intact; pressure on margins to continue for two more quarters
n Downgrade to Accumulate; Maintain target price of Rs336
Revenue growth impacted by lower domestic sales
IPCA’s revenue growth of 17% to Rs.4.6bn (below est. of Rs4.76bn) was due to a) 9%
growth in the domestic business (vs. est. of 18%) and b) 26% growth in the exports (vs.
est. of 24%). The growth in the domestic portfolio was below our estimates on account
of lower tender sales (down by Rs90mn YoY), excluding which the branded portfolio
grew strongly by 17% YoY. CVS, anti-diabetic and anti-malarial portfolio grew by 15%,
28% and 31% YoY respectively over 9MFY11. Nephrology and Neurology divisions
clocked sales of Rs60mn during the quarter. Company has added ~1200 MRs in the last
12 months taking the total field strength to approx. 5000. We believe the ramp-up in
sales force will contribute to revenues only from 2HFY12E onwards.
Generic business in regulated markets continue to drive export growth
Ipca’s generic business continues to get driven by robust US business coupled with
tender sales. Over 9MFY11, a) US sales grew 66% YoY to Rs748mn, and b) Europe
business grew by 3% YoY (on a higher base) to Rs1.7bn. This growth is commendable,
as during the quarter average $ realization declined from Rs46.6 to Rs45.0 and average
sterling pound realization declined from Rs76.1 to Rs70.9. Management has guided for
sales of Rs700-850mn and Rs1-2bn in FY11E and FY12E respectively from its
institutional tender business. Going forward, the institutional tender business in the
exports market is expected to remain strong for the company.
Exports branded business gathering pace
During the quarter, Russian branded segment clocked sales of Rs530mn (up 43%YoY)
with 14 products in market currently. Latam business was up 76% (Rs50mn) and Middle
East/Africa was up 9% (Rs173mn) during 9MFY11. Going ahead, management has
indicated Russia business to clock growth in excess of 30% led by higher approvals.
High employee and SGA cost impacted operating performance
Operating margins for the quarter declined by 384bps to 19% mainly because of a) 277bps
increase in other expenditures, b) higher employee expenses (up 20% YoY), and c) lower
realization in Sterling and USD. The increase in other expenditures is mainly on account of
higher marketing and personnel cost (new people addition). Management has iterated that
field force addition has largely stabilized. Moreover, company is also incurring cost of
Rs50mn per quarter on account of Indore SEZ which has yet to contribute to topline
(UKMHRA, WHO inspection is over; no timelines were ascertained for USFDA inspection).
Going forward, as the new field force will start contributing revenue, we expect margins to
improve gradually. Management has guided for EBIDTA margins of 20-21% for FY11E.
PAT at Rs640mn - below expectations
PAT at Rs640mn was below our expectations (we expected Rs684mn) because of a) 19%
increase in depreciation cost and b) higher tax provision (23% of PBT vs. our assumption of
20% of PBT) as the company is also paying tax on loss from its Indore SEZ plant. The
company has incurred forex gain of Rs112mn vs. forex loss of Rs16.5mn in Q3FY10. Over
9MFY11, the company clocked an EPS of Rs15.8 against our full year expectation of Rs20
for FY11E. Going ahead, we believe net profit to grow at 21% CAGR to Rs3050mn over
FY10-12E, clocking an EPS of Rs24.5 in FY12E.
USFDA approval of SEZ plant – next growth driver
Ipca started its US business in September 2008 and 7 products commercialized in the US
have garnered market share in excess of 15%. Currently, Ipca supplies generics products
to the US from its Piparia (Silvassa) facility. In order to address the issue of capacity
constraints, the company has set up a new plant at the Indore SEZ, which is awaiting US
FDA approval. Ipca has already started filing ANDAs from the site. Post approval, the
facility would help Ipca significantly ramp up its US business. The company has identified
65 products for the US market for the next 3-4 years and expects around 50 ANDA filings in
the next 3-4 years. With no revenues from the facility currently, the company is incurring
unabsorbed annual fixed overheads of Rs220mn. We have not factored in any revenue
from the facility in our estimate; hence, approval and commercialization at the facility would
provide upside to our estimates.
Downgrade to Accumulate with a target price of Rs336
We continue to maintain our earning estimates of Rs20 and Rs24.5 for FY11E and FY12E
respectively. However, with limited upsides from current levels we downgrade the rating
one notch to Accumulate from Buy. At CMP, IPCA trades at 12.7x FY12E EPS, at
significant discount to the sector, which is reasonable considering stable domestic
business, growing export formulations and strong balance sheet (D/E of 0.5x; RoE > 25%).
We expect valuation gap with peers to narrow on account of sustained growth (21% EPS
CAGR) led by expanding product portfolio, increasing penetration in tier II-III cities and
improving profitability.
We believe the company to improve its earnings trajectory from Q2FY12 onwards on
account of incremental contribution because of field force expansion. Ipca has received
MHRA (UK) approval for its Indore SEZ facility and expects to get WHO accreditation in
Q4FY11. Commencement of operations for supplies to UK and WHO will lead to improved
operating leverage. We are of the view that Ipca provides good visibility in terms of
consistent CAGR growth of 20% over next few years on the back of its focus on branded
formulations segment, geographical expansions in semi-regulated markets, new product
launches in fast growing chronic segment and focus on European and US markets.
Maintain our price target of Rs336 on the stock with a positive bias.
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