IPCA Laboratories (IPCA IN, INR 446, Buy)
Our earnings are 12%-16% ahead of Street on account of: a) strong ramp-up in the US business, b) higher traction in domestic business and c) 30% CAGR in Institutional Anti-Malaria (IAM). We expect earnings CAGR of 29% (Street estimates at 19%), driven by 19% revenue CAGR and 250bps margin expansion over FY12-14E. With a profit of INR5bn by FY14, IPCA will enter the big league that would potentially re-rate the stock. We initiate with ‘BUY/SO’ rating and TP of INR582/share (14x FY14E EPS).
Improved domestic outlook limits downside risks
Post corrective actions, domestic business (ex-malaria) is recovering, led by higher field force productivity and better retention rates while key brands such as Zerodol and HCQS continue to do well, posting ~35%-40% growth. We expect 16%-17% growth in FY13, despite lower anti-malarial demand, which limits downside risk to our estimates.
US generics turns new growth driver
Post the FDA nod for Indore SEZ, IPCA plans to aggressively scale up its US operations. New approvals and site transfers are estimated to add incremental ~USD20mn sales next fiscal as capacities get freed to service higher demand for existing products. IPCA plans to step up filings which could add USD60mn-70mn sales to the current base.
Institutional Anti-Malaria offers long term growth potential
IPCA has been successful in leveraging its global API strength to create a highly profitable institutional business with INR3bn sales in FY12 from INR276mn in FY10. IAM has a strong scale up potential to INR5bn sales by FY14 aided by a higher market share in global tenders and supplies from new combination drugs.
Outlook and Valuations: Re-rating not far away
IPCA’s strong execution track record and focus on profitable investments render higher earnings growth and the best in class ROEs/ROCE. It is likely to see an expansion in multiples from the current average of 10-12x to 14-16x as earnings are estimated to cross INR5bn by FY14. This is line with the historical precedence of players like Lupin and Cadila. We value company at 14x FY14 EPS and initiate coverage with ‘BUY’ rating.
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