IPCA Labs is one of the better managed mid-cap pharma companies:
Consistent improvement in profitability along with strong growth in
business. Both of the key business segments of the company viz.
international formulation business and domestic formulation business are
likely to do well over next couple of years.
International business to grow on the back of strong revenue ramp-up: In
US post the recent USFDA approval for company’s Indore SEZ which
eliminates supply constraint faced by the company. Expect 31% revenue
CAGR in US over FY12-14. Further, institutional business is scaling up
rapidly with revenue expected to move up from Rs1.22b in FY11 to Rs4b in
FY14. IPCA is set to become one of the largest players globally in antimalaria
tender business and this is the most profitable business for the
company. Branded formulation exports are likely to grow at 25% CAGR led
by increasing geographic penetration and new product launches.
Domestic formulation business to outperform the industry: The company
has consistently outperformed the industry in the past, led by rising share
of chronic segments, product selection, increase in the field force and
brand building activity. The contribution from fast growing and lucrative
chronic therapeutic segments is on rise. It currently contributes 65% to
domestic formulation business. The performance in FY12 was impacted by
lower incidence of Malaria, high attrition in the field force and
restructuring of marketing divisions. However the management has taken
corrective measures and growth of this business should be robust going
forward.
Outlook and Valuations: We expect strong earnings CAGR of 35% over
FY12-14 led by robust topline growth of 17% over the same period.
Despite Rs5b capex planned over next 2 years, the company is likely to
sustain healthy return rations and low gearing. Expect RoCE to remain
above 25% for next 2 years with free cash-flow generation of Rs3.3b. The
stock is trading at 14.4xFY13E & 11.1xFY14E earnings which is at significant
discount to large cap and some of the mid-cap companies in the sector.
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