Ipca Laboratories – 3QFY2011 Result Update Angel Broking

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

 Ipca Laboratories – 3QFY2011 Result Update

Angel Broking maintains a Neutral on Ipca Laboratories.

For 3QFY2011, Ipca Laboratories (Ipca) reported lower-than-expected results.

Top-line growth of 17.6% was below our estimate of 20.6% growth. However,

net profit growth met our estimates after accounting for forex translation gain of

`11.2cr during the quarter. We remain Neutral on the stock at these levels.

Results below expectations: Ipca reported net sales of `463.4cr (`393.9cr), up

17.6%, but below our estimates of `474.9cr. The company’s overall formulations

business grew by 21.1% to `344.6cr (`284.7cr), contributing 74.4% (72.3%) to

revenue. The API business witnessed 8.7% growth during the quarter at `118.7cr

(`109.3cr), contributing 25.6% (27.7%) to revenue. The company posted OPM of

19% (22.5%), which was below our estimate of 21.1% due to much higher

employee and SG&A expenses. Excluding the forex gain, recurring profit came in

at `52.7cr (`59.9cr), down 12% yoy, impacted by lower OPM, higher

depreciation and tax charges.

Outlook and valuation: We expect net sales to post an 18.1% CAGR to `2,175cr

and EPS to register an 18.7% CAGR to `23.1 over FY2010–12, driven by the US

and domestic markets and the API segment. At current levels, the stock is trading

at 16.6x and 13.4x FY2011E and FY2012E earnings, respectively. We maintain

our Neutral recommendation on the stock.

Revenue below estimates, up 17.6%: Ipca reported net sales of `463.4cr

(`393.3cr), up 17.6% but below our estimates of `474.9cr. The overall

formulations segment grew by 21.1% to `344.6cr (`284.7cr), contributing 74.4%

(72.3%) to revenue. The API business grew by 8.7% at `118.7cr (`109.3cr),

contributing 25.6% (27.7%) to revenue.

In the domestic domain, formulation sales grew by 11.7% to `177.5cr (`158.9cr),

whereas API sales declined by 4.7% to `32.2cr (`33.8cr).

On the export front, formulation sales strongly grew by 32.9% to `167.1cr

(`125.7cr), driven by the generic business. The API segment reported growth of

14.7% to `86.5cr compared to `75.5cr in 2QFY2011.

OPM contracts on the back of higher employee and SG&A expenses: Ipca reported

a drop in its gross margins to 58.7% (59.3%) for the quarter. OPM came in at 19%

(22.5%), which was below our estimate of 21.1%, impacted by higher SG&A and

employee expenses.

SG&A expenses grew by 31.2% to `119.3cr (`90.9cr) due to higher promotional

expenses. Employee expenses also witnessed a spurt of 20% to `64.9cr (`54.1cr),

owing to addition of MRs (1,200 over the last 9MFY2011).

Ipca recently added two new divisions of neurology and nephrology to its portfolio.

Consequently, the company’s field force increased to 5,000 MRs, which would aid

growth going forward

Recurring profit in line with estimates: Ipca reported net profit of `63.9cr (`58.3cr),

up 9.8% yoy, in line with our estimates of `63.4cr. Net profit was boosted by forex

translation gains of `11.2cr during the quarter as against loss of `1.6cr in

3QFY2010. Excluding the gains, recurring profit came in at `52.7cr (`59.9cr),

down 12% yoy, impacted by lower OPM, higher depreciation and tax charges.

Concall takeaways

􀂄 Management indicated that it would incur capex of `200cr in FY2011 and

would be following a similar trend in FY2012 as well.

􀂄 With respect to MR additions, management indicated that the current strength

is still lower to cover the doctor’s fraternity and further additions are expected

in the coming quarters to widen the company’s reach.

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 ramped up its field force significantly by 1,000 MRs (a 30% increase) by

adding three more divisions in the domestic formulations segment, taking the total

strength to nearly 5,000 MRs as of 9MFY2011.

Exports to be the next growth avenue: On the formulations front, Ipca 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 and anti-malarial segments along with tapping new

geographies. On the API front, where it is among the low-cost producers, Ipca is

aggressively pursuing supply tie-ups with pharma MNCs.

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 post sales of `300cr–350cr (19% of its FY2010

revenue). Further, Ipca has received approval from the WHO for its anti-malarial

product, making the company eligible to participate in the global tender worth

US $300mn along with three other players.

Valuation: We expect Ipca to report an 18.1% CAGR in net sales to `2,175cr and

an 18.7% CAGR in EPS to `23.1 over FY2010–12, driven by the US and domestic

markets and the API segment. At current levels, the stock is trading at 16.6x and

13.4x FY2011E and FY2012E earnings, respectively. We maintain our Neutral

recommendation on the stock