IPCA Laboratories - Diwali Picks 2012 - IIFL

Robust domestic market growth to persist

Ipca Lab has one of the best franchise in domestic market. The company is a fully integrated pharmaceutical company with balanced focus at domestic and international market. Ipca has outperformed Indian Pharmaceutical Market (IPM) by ~600 bps, with a CAGR of ~20% over FY05-12. Traditionally, Ipca was a market leader in the therapeutic segments like Anti-malarial. But now, Ipca, with a market share of 1.7% and ~5000 market representatives(MR), thrives hard to out pace IPM each year in all possible chronic categories. We believe the companies' strategies like growing share of chronic therapeutic segments in revenue mix, focus on brand building and new launches along with expansion in the field force, will help Ipca to keep growth momentum upbeat.We expect 15% revenue CAGR over FY12-15 in domestic formulations.

Superior business mix bode well with the strategy of diversification

Ipca has a strong franchise in the Indian branded business coupled with high margin exports. The company derives 52% of the revenues from export market. It has built a strong international formulation business with presence in 110 countries across various geographies. Again, the mix in the export countries is also balanced with revenues from generic business in US, Europe and Africa and branded sales form emerging countries like Russia South/Central American and Western African countries. We believe this is a superior business mix in terms of margin and top line, which bodes well with the strategy of diversification.

Vertical integration at its best; operating leverage to flow in

IPCA is one of India's largest API producers with leadership in 15 APIs. IPCA's API basket bodes well for the company in terms of vertical integration benefit (~90% of the drugs are vertically integrated) along with revenues from outside sales. The company enjoys 50-70% market share in these APIs along with decent margins unlike peers. We believe growing business with vertical integration will help company to remain competitive in long run.

US business to aid in export growth

Ipca has been facing capacity issues for the last few quarters. Export business, which was restrained due to capacity constraint, now will flourish following the Indore SEZ approval. With Indore SEZ approval, we expect further enhancement in margins to 22.7% by FY14E. According to management, the full utilization of new capacity at Indore can add ~Rs4bn incremental annual sales. We expect Indore facility to contribute ~Rs750-1000mn of revenues by FY14.

Attractive valuations; Recommend BUY

Ipca has a strong franchise in Indian branded business (55% of total business) coupled with high margin exports. We estimate Revenue and PAT CAGR of 20% and 31% over FY12-14, respectively. We believe the valuations are still attractive at 11.3x FY14E EPS. We recommend BUY.

Source : Equity Bulls

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