Buy IPCA Labs - Target Price Rs. 710 - Prabhudas Lilladher

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

International business will drive both, top-line growth and profitability: We expect a healthy ramp-up in IPCA's international formulations revenues led by 25% CAGR in branded formulations business. Though small in size, branded formulations is one of the most profitable businesses for IPCA, with EBITDA margin of 27-28%. Further, institutional business is scaling up rapidly, with revenue expected to move up to Rs4.5bn in FY14. Though the company faced temporary setback in US, it remains IPCA's key growth driver over medium-to-long term as the company has very small base and strong vertical integration capabilities which offers cost advantage.

Domestic formulation business to outperform 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 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 top-line growth of 18% over the same period. Despite Rs5bn capex planned over next two years, the company is likely to sustain healthy return rations and low gearing. We expect RoCE to remain above 25% for next two years, with free cash-flow generation of Rs3bn. At the current valuation of 17.1x FY13E and 12.3x FY14E, the stock looks attractive, given solid business fundamentals, superior profitability, strong balance sheet and growth prospects. We expect gradual re-rating in stock and recommend BUY, with target price of Rs710.

Source : Equity Bulls

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