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IPCA Labs -Margin pressure; Outlook firm
„3Q miss on cost pressure; Revise forecasts & PO
IPCA’s 3Q adj profits at Rs561mn declined 6% yoy on weak EBITDA margins,
however forex gains aided 10% reported PAT growth. While revenue growth at
18% was in line with estimates, weaker margins (at 19.5%) led to flattish EBITDA
growth. Domestic formulations grew at 12% (lack of tender biz.) while export
formulations surged 33% YoY led by US, CIS. We revise our forecasts marginally
(~3%) to factor in near term cost pressures, reducing our PO to Rs355 (at 15x
FY12E, 15% discount to sector). US facility approval remains key upside trigger.
Margin pressure to persist for next 2-3 quarters
3Q margin decline of 331bps was largely due to recent fieldforce addition (1000 in
last 3 qtrs) increasing promotion costs as well as surge in freight charges. While
fieldforce would become productive from next quarter, we expect margins to
stabilize at 21%+ levels after 2-3 quarters. Unabsorbed overheads of ~Rs250mn
annually in Indore SEZ are likely to recede on start of UK shipments (1HFY12) &
expect facility approval (by 2HFY12) as recent filings for PEPFAR has triggered
compulsory visit in next 6 mths. Higher export tender wins may surprise on upside
Domestic momentum sustains, Formulation exports shine
Lack of tender business affected domestic formulations growth, adjusting for
which the business grew ~17% (up 19% YTD). Exports surged 33% YoY driven
by strong US, Russia and RoW markets. Tender business (exports) contributed
Rs191mn in 3Q, expect further upside from new tender wins (~Rs400mn in 4Q).
We remain confident of robust 18% revenue CAGR driven by strong domestic
business (driven by strong fieldforce) & export business aided by pipeline.
Management call highlights
(a) Tender wins for Artimether+Lumefantrine may exceed Rs1bn for FY11
(Rs533mn YTD), (b) Forward hedges (60% of exports) at ~Rs48 per USD to
protect losses from currency fluctuations. (c) To file 18 ANDAs in FY12, adding to
current pipeline of 22 (11 approved), boosting US generics outlook.
Price objective basis & risk
IPCA Labs (XBLAF)
Our PO of Rs355 is based on 15x FY12E EPS of Rs23.9. Our target multiple is at
a 15% discount to Indian pharma peers trading at c18x FY12E. Our PO is pegged
at the upper end of its historical 1-yr forward P/E band as we believe re-rating is
justified on robust earnings growth outlook (20% earnings growth) and improving
business mix. Higher upside from Artemether-Lumefantrine tender (WHO) and
earlier than expected USFDA approval for Indore SEZ may provide upside
triggers.
Downside risks: (a) International generics pricing pressure (b) regulatory delays
and (c) foreign exchange fluctuation.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
IPCA Labs -Margin pressure; Outlook firm
„3Q miss on cost pressure; Revise forecasts & PO
IPCA’s 3Q adj profits at Rs561mn declined 6% yoy on weak EBITDA margins,
however forex gains aided 10% reported PAT growth. While revenue growth at
18% was in line with estimates, weaker margins (at 19.5%) led to flattish EBITDA
growth. Domestic formulations grew at 12% (lack of tender biz.) while export
formulations surged 33% YoY led by US, CIS. We revise our forecasts marginally
(~3%) to factor in near term cost pressures, reducing our PO to Rs355 (at 15x
FY12E, 15% discount to sector). US facility approval remains key upside trigger.
Margin pressure to persist for next 2-3 quarters
3Q margin decline of 331bps was largely due to recent fieldforce addition (1000 in
last 3 qtrs) increasing promotion costs as well as surge in freight charges. While
fieldforce would become productive from next quarter, we expect margins to
stabilize at 21%+ levels after 2-3 quarters. Unabsorbed overheads of ~Rs250mn
annually in Indore SEZ are likely to recede on start of UK shipments (1HFY12) &
expect facility approval (by 2HFY12) as recent filings for PEPFAR has triggered
compulsory visit in next 6 mths. Higher export tender wins may surprise on upside
Domestic momentum sustains, Formulation exports shine
Lack of tender business affected domestic formulations growth, adjusting for
which the business grew ~17% (up 19% YTD). Exports surged 33% YoY driven
by strong US, Russia and RoW markets. Tender business (exports) contributed
Rs191mn in 3Q, expect further upside from new tender wins (~Rs400mn in 4Q).
We remain confident of robust 18% revenue CAGR driven by strong domestic
business (driven by strong fieldforce) & export business aided by pipeline.
Management call highlights
(a) Tender wins for Artimether+Lumefantrine may exceed Rs1bn for FY11
(Rs533mn YTD), (b) Forward hedges (60% of exports) at ~Rs48 per USD to
protect losses from currency fluctuations. (c) To file 18 ANDAs in FY12, adding to
current pipeline of 22 (11 approved), boosting US generics outlook.
Price objective basis & risk
IPCA Labs (XBLAF)
Our PO of Rs355 is based on 15x FY12E EPS of Rs23.9. Our target multiple is at
a 15% discount to Indian pharma peers trading at c18x FY12E. Our PO is pegged
at the upper end of its historical 1-yr forward P/E band as we believe re-rating is
justified on robust earnings growth outlook (20% earnings growth) and improving
business mix. Higher upside from Artemether-Lumefantrine tender (WHO) and
earlier than expected USFDA approval for Indore SEZ may provide upside
triggers.
Downside risks: (a) International generics pricing pressure (b) regulatory delays
and (c) foreign exchange fluctuation.
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