IPCA has transformed itself from a leading API manufacturer to a fully
integrated formulation company. We anticipate domestic formulations
to sustain growth trajectory from hereon (16% CAGR over FY12-14E) aided
by growth in CVS & pain management. We expect export formulations
to register 21% growth over FY12-14E mainly driven by increasing ramp
up in its US generics biz and higher contribution from institutional based
sales. The Indore SEZ will contribute revenue of ` 300-400mn in FY13E
(all of it in Q4FY13E) and ` 1bn in FY14E. Approvals from the recently
FDA approved Indore SEZ facility (approx 12-14 filings so far) is expected
to kick in Oct-Nov’12 onwards. The management appears confident of
US generics business to reach USD100mn by FY16E.
EBITDA margin guidance for the year is an improvement of 225bps YoY
(150bps shall be forex benefit). The management re-iterates its long
term growth strategy - doubling of revenues every four years.
Key takeaways from management interaction
Domestic formulation business: To sustain growth trajectory..
Anti-malarial segment derives revenue from anti-falciparum and anti-vivax
category products in roughly equal proportion. Brands such as Lumerax,
Rapither are doing well.
Field force productivity has come down from ` 3 lakhs per month sales per
MR to ` 2.25 lakhs (lowest being 2 lakhs). The average cost per MR is ` 30k
with potential business generation of ` 1Lakh. The management indicated
that it will add an MR so long as he adds to the topline growth. Prefers
revenue addition to field force productivity. The attrition rate stands comfortable
at 18-20%.
Uptick in sales growth was also on account of realignment of sales force to
target specific TA’s. For instance, a focused team has been allocated towards
CVS and pain management segments. The benefit from this restructuring is
expected to continue in subsequent quarters as well.
The implementation of proposed pricing policy (format of ceiling price fixed
at average of top 3 brands) shall not have a significant impact on topline.
The company does not appear keen to enter into any marketing tie ups with
MNC’s as a growth strategy which most peers have adopted.
Remains confident of 16-20% growth in domestic formulations.EBITDA
margin is in the range of 24-25% for this vertical.
US Generics: Scale up potential in sight
Despite being a late entrant in the US, the company is confident of garnering
at least 20% market share (witnessed earlier with launches through Ranbaxy)
owing to backward integrated manufacturing capabilities.
Entered into a profit-sharing agreement with Ranbaxy for marketing most of
its products in US. The agreement is valid for 5 years from the launch of a
product. Under the agreement, the company will share 10% sales and 50% of
profit with Ranbaxy.
IPCA enjoys as low as 20% and as high as 70% market share in the products
it manufactures and sells. This is due to its fully integrated capabilities.
So far, a total of 25 ANDAs have been filed (12 approved) in US. Of them, 7-8
are from Indore SEZ and another 5 will be filed from the facility this year,
taking the total to 12-13 products. Approvals are expected to start from Oct
2012.
Besides, the company has also applied for 5-6 site transfers, which will be
approved in Feb 2013.
The Indore SEZ will contribute revenue of ` 300-400mn in FY13E (all of it in
Q4FY13E) and ` 1bn in FY14E. Revenue contribution is subject to timely
product approvals by the FDA.
Can generate ` 4bn in sales at peak capacity with all 12-13 products approved
by FY16E. Total US sales is expected to reach USD 100mn in FY16E.
Only 7 acres of land of the 60 acres available has been utilized at the Indore
site. Total investment till date has been ` 1.6bn.
Commercialization of the unit and consequent sales to the US will accrue
operating leverage benefits to be reflected FY14E onwards.
Institutional business: Headroom for growth
Garnered 20% market share in the artemether+lumafantrine market. Will garner
` 500-600mn from artesunate+amodiaquine in FY13E and overall ` 4 - 4.25bn
from the institutional business in FY14E.
Has started developing artemisinin (raw material for anti-malarials) in-house
to enable timely availability. Current production is taking care of domestic
supply.
Currently, the commonly applied injectable anti-malarial is quinine which is
highly toxic. IPCA is developing artemisinin injectables as an alternative to
quinine which has single player dominance today.
Europe: Non UK revenue growth at 30-35% albeit on low base.
UK business is expected to grow by 12-15%. European business excluding
UK is expected to grow by 30% due to low base effect, 3-4 new launches
every year and increased geographical penetration.
Other Key highlights
The company will incur capex of ` 2.5bn towards adding adding 2 API plants
in Baroda (expected to be commercialized in Dec 2013), 1 injectables plant,
1 office and R&D centre. The company’s current API capacity is running close
to optimum level.
The company has an objective of doubling its topline every four years.
Hedges only 9 months of its net exports. Imports constitute an insignificant
proportion of their raw material cost. 2/3rds of the long term borrowing is forex
denominated. Outstanding hedges stand at USD 70mn.
Valuation
IPCA’s growth mantra revolves around creating a competitive position in formulations
by leveraging on its API goldmine. We expect acceleration in export formulation
revenues mainly led by the generics arm (US market in particular post FDA approval
to its Indore site) and sustained growth in branded promotional markets. Healthy
rebound in domestic formulation revenues hereon shall add to growth momentum.
We have increased our FY14E EPS estimate by 4% to reflect higher profit margins
aided by favourable sales mix & operating leverage benefits from Indore SEZ.
At CMP, the stock trades at 14.1x FY13E and 11.8x FY14E earnings. We
recommend ‘Accumulate’ on the stock with a revised target price of ` 487
(13x FY14E EPS).
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