Accumulate IPCA Laboratories - TP Rs.468 - Dolat Capital

Topline above estimates with an operationally strong quarter. Forex losses restrict bottomline growth.

IPCA Labs' recorded better than expected revenue growth - up 19.7% YoY to Rs.6.34bn. Growth was primarily driven by rebound in domestic formulation (up 18.6% YoY) and 58% growth in export API's (ramp-up in recently added capacities as well contribution from Tonira Pharma).

On the other hand, export formulations grew mere 9% YoY, restricted due to (1) "Track & Trace" issue & delay in artwork approval in the EU & Russia, (2) lagged US sales due to capacity constraints and (3) delayed shipment in the Institutional segment.

The Indore SEZ facility received FDA approval in July 2012 and will contribute to the topline by Q4FY13E (peak sales of USD 100mn). The company will apply for 8 ANDAs from the facility in FY13E, including 5-6 site transfer approvals.

The company also received approval for artesunate+amodiaquine - revenue contribution expected by Q4FY13E. The market size for the product is Rs.1.5-2bn and no significant competition is envisaged for next two years.

EBITDA margins stood at 22.3% (up 450bps YoY) mainly due to lower staff costs at (down 130bps YoY) and other expenses (down 230bps YoY). Raw material costs too stood lower by 100bps YoY aided by favourable sales mix. About 300bps of the margin improvement was attributed to currency benefit.

The company has recorded forex loss of Rs.589mn during the quarter (forex gain of Rs.91mn - Q1FY12).

Reported PAT consequently de-grew by 30.5% YoY to Rs.430mn. The management has guided revenue growth in range of 17-20% for FY13E subject to recovery in anti-malarial segment. EBITDA margins are guided to improve by 225bps YoY aided by better sales mix, cost reduction in the API segment and higher export realizations.

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 FY13E/14E EPS estimates by 8.8%/6.0% to reflect increased revenue contribution from Export API business and higher margins aided by favourable sales mix & currency benefits.

At CMP, the stock trades at 13x FY13E and 11.4x FY14E earnings. We recommend 'Accumulate' on the stock with a revised target price of Rs.468 (13x FY14E EPS).

Source : Equity Bulls

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