Buy IPCA Laboratories - Prabhudas Lilladher

IPCA Labs is one of the better managed mid-cap pharma companies: Consistent improvement in profitability along with strong growth in business. Both of the key business segments of the company viz. international formulation business and domestic formulation business are likely to do well over next couple of years.

International business to grow on the back of strong revenue ramp-up: In US post the recent USFDA approval for company's Indore SEZ which eliminates supply constraint faced by the company. Expect 31% revenue CAGR in US over FY12-14. Further, institutional business is scaling up rapidly with revenue expected to move up from Rs1.22b in FY11 to Rs4b in FY14. IPCA is set to become one of the largest players globally in antimalaria tender business and this is the most profitable business for the company. Branded formulation exports are likely to grow at 25% CAGR led by increasing geographic penetration and new product launches.

Domestic formulation business to outperform the industry: The company has consistently outperformed the industry in the past, led by rising share of chronic segments, product selection, increase in the field force and brand building activity. The contribution from fast growing and lucrative chronic therapeutic segments is on rise. It currently contributes 65% to domestic formulation business. The performance in FY12 was impacted by lower incidence of Malaria, high attrition in the field force and restructuring of marketing divisions. However the management has taken corrective measures and growth of this business should be robust going forward.

Outlook and Valuations: We expect strong earnings CAGR of 34% over FY12-14 led by robust topline growth of 17% over the same period. Despite Rs5b capex planned over next 2 years, the company is likely to sustain healthy return rations and low gearing. Expect RoCE to remain above 25% for next 2 years with free cash-flow generation of Rs3.5b. The stock is trading at 15.1xFY13E & 11.7xFY14E earnings which is at significant discount to large cap and some of the mid-cap companies in the sector.

Source : Equity Bulls

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