IPCA Labs USFDA approval for Indore SEZ aids visibility; Raise PO �� BofA Merrill Lynch,

IPCA Labs
USFDA approval for Indore SEZ
aids visibility; Raise PO
�� Raise PO on improved visibility; Reiterate Buy
The much-awaited approval of IPCA’s Indore SEZ facility by USFDA opens up
growth opportunities for IPCA. While we had factored this for 2HFY13, an earlier
approval improves sales visibility for the US business, facing supply constraints
currently. We raise our sales forecasts by ~3%, mainly on higher US sales,
leading to an EPS estimate increase of 2-3%. Accordingly, we raise our PO to
Rs450, to factor (a) the higher EPS estimates and (b) a likely re-rating to 15x
FY13E P/E (vs. 14x) on higher visibility.

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Indore SEZ approval opens up US growth prospects
The prolonged delay in approval of Indore SEZ by USFDA post inspection in Jan’12
had constrained IPCA’s US sales growth, facing capacity shortage currently.
Moreover, lack of sales from the unit also led to unabsorbed fixed overheads of
Rs220mn p.a (inc. depreciation), which can now be recovered. We expect a rampup
in ANDA approvals from the facility (5 pending) and site transfers to accelerate
growth, as commercial shipments to the US would commence in 4QFY13. We now
expect US business to potentially double by FY15E, to Rs3.5bn (10% of sales, 26%
CAGR), with improved profitability on the rising scale of operations.
Revival in domestic formulations growth to aid re-rating
Post weak performance in FY12 (up 8%), we expect IPCA’s domestic formulation
growth to revert to the historical average (17% CAGR over FY06-12) going ahead. We
expect an 18% CAGR in domestic formulations (33% of sales) to be driven by (a) the
impact of productivity improvement of the new fieldforce (1500+ added in the last 2
years), (b) increased penetration to tier 2/3 cities and (c) expanded doctor coverage.
Valuation gap to narrow on strong earnings momentum
IPCA trades at 12.8x FY13E EPS, a 25-30% discount to the sector, which is likely
to narrow on (a) a 23% EPS CAGR, (b) 24-26% RoEs, and (c) a strong domestic
franchise. For 1Q, we expect PAT (ex-forex) at Rs756mn (up 38%), led by 17%
sales growth and 32% growth in EBITDA (230bps margin expansion).


IPCA Labs (XBLAF)
Our PO of Rs450 is based on 15x FY13E EPS of Rs30. Our target multiple is at a
discount to Indian pharma peers, trading at c16x FY13E. Our PO is pegged at the
upper end of its historical 1-year forward P/E band, as we believe re-rating is
justified on a robust earnings growth outlook (18% recurring earnings growth) and
improving business mix. Higher upside from the Artemether-Lumefantrine tender
(WHO) and stronger-than-expected ramp-up in US generics likely to be key
upside risks.
Downside risks: (a) International generics pricing pressure, (b) regulatory delays
and (c) foreign exchange fluctuation.