IPCA Laboratories - Ratlam Import Ban: US Plans Derailed, Once Again; Company Update :: Edelweiss

Please Share::

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

��

-->

The USFDA has issued an import alert for IPCA Laboratories’ (IPCA) Ratlam API unit, but has exempted 5 APIs from the ban. We believe the company will restart shipping this set of APIs (and associated ANDAs) after its voluntary ban in July 2014, which will boost US sales in FY16/17. However, we cut our earnings (8%/13%/16% for FY15/16/17E) to account for remediation expenses, emerging markets/ EU currency impact and ongoing pressure on institutional malaria business. We reduce our target multiple for IPCA to 14x (16x earlier) and downgrade to ‘HOLD’ to factor in the derailment of the earnings thesis that was based on: (i) US ramp up-driven operating leverage; and (ii) advantage of low cost driven by high throughputs. We lower our TP to INR690 (14x FY17E) versus INR760 (16x FY16E) earlier. Ipca is now our least preferred mid-cap stock.

Ratlam unit import ban: Near-term boost, long-term challenge

FDA’s of 5 APIs from the ban is a move to avoid shortage situations in the US where IPCA had a significant market share (HCQS: ~80%, Propranolol: ~40%, etc.) prior to July 2014. HCQS has already seen price hikes by 350% (Cadila a beneficiary) after IPCA’s exit and this will boost the latter’s US sales on restarting supplies. We expect the import alert resolution to take 2 years or more, which delays US ramp up to FY18 onwards. Near-term efforts towards API sourcing will be at a lower margin and along with higher regulatory/quality costs will make US business less profitable.

Core investment thesis shaken

Low-cost manufacturing on high throughputs and US business ramp up were the 2 core drivers of surge in IPCA’s earnings. We believe, both these have now been postponed at least for the next 3 years. With EMs also impacted by currency, delayed US ramp up plans and institutional malaria business under pressure, Ipca’s India business remains the sole revenue driver. Higher investments in upgrading quality/regulatory standards, costs towards remediation and poorer cash flows will hurt IPCA’s return ratios.

LINK
https://www.edelweiss.in/research/IPCA-Laboratories--Ratlam-Import-Ban-US-Plans-Derailed,-Once-Again;-Company-Update/28122.html