Accumulate IPCA Laboratories Ltd - Dolat Capital

IPCA has transformed itself from a leading API manufacturer to a fully integrated formulation company. We anticipate growth in its domestic franchise (16% CAGR over FY13-15E) to be mainly driven by key TA's - CVS & pain management. Notably, approx. 45-50% of the company's current product portfolio will come under coverage of the new pricing policy, which may restrict growth momentum.

On the other hand, we expect export formulations to register 20% growth over FY13-15E mainly driven by ramp up in its US generics biz and higher contribution from institutional based sales. We anticipate the Indore SEZ unit shall contribute revenue of Rs.550mn in FY14E (assuming successful re-inspection in April'13) and Rs.1.2bn in FY15E. The company has secured 4 product approvals so far and has 16-17 filings from the Indore unit. It anticipates Indore plant to deliver EBITDA margins in the range of 15-20% owing to backward integrated manufacturing efficiencies.Operating leverage benefits shall be fully reflected FY15E onwards.Delay in FDA nod to Indore unit poses a risk to estimates for FY14E.

The management is confident of achieving 18-20% growth during the year, while it expects on a continuing basis a moderate 16% growth in FY14E (assuming nil revenues from Indore unit). However, FY15E shall witness a healthy 18-20% growth rate with increased contribution from US generics (factoring in revenue from Indore facility).

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. We have lowered our FY14E EPS estimate by 4% to reflect a) lowered revenue contribution from Indore SEZ and postponement in operating leverage benefits to FY15E and b) increasing R&D spend.

Downside risks to our FY14E earning estimates includes: a) Any further delay in FDA approval to its Indore SEZ & b) Deceleration in domestic formulations business (45-50% portfolio coverage under NLEM).

At CMP, the stock trades at 13.8x FY14E and 11.5x FY15E earnings. We recommend 'Accumulate' on the stock with target price of Rs.572 (13x FY15E EPS).

Source : Equity Bulls

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