IPCA Laboratories - Indore Facility Gets USFDA Clearance - Nirmal Bang

The US Food and Drug Administration's (USFDA) approval for Ipca Laboratories' (ILL) solid dosage formulations manufacturing facility at Indore SEZ is a major positive, in our view, and can lead to significant scale-up in the US business, which largely remained flat in FY13 (excluding currency benefits). The material impact on financials, however, will be visible only from FY15, as setting up of a supply chain will take one or two quarters. We had assumed USFDA clearance in FY15 and hence there is no need to revise our estimates. However, with the overhang on the US business removed, we have valued the stock at a higher multiple of 16x (as against 15x earlier) at Rs747 (from Rs702 earlier) based on FY15E EPS of Rs47 (FY15E EPS is 6% above Bloomberg consensus estimate).

Background: During the internal quality assurance review in November 2012, ILL noticed a few non-conformances at its Indore facility (the unit was approved by the USFDA earlier) and the company voluntarily reported the same to the US regulator. ILL also suspended commercialisation of its products till the issue gets resolved. Excluding Indore, ILL's only other USFDA-approved plant at Silvassa operates at full capacity owing to which the company was unable to scale up volume and thus US sales largely stayed flat in FY13, in constant currency terms.

US revenue could nearly double in FY15: ILL has three USFDA-approved products from the Indore facility, but their launch will be spread over the next couple of quarters - as per the management - in order to put the supply chain in place. Effectively, this means that any meaningful impact from launch of the products will be visible only from FY15, which is currently our assumption too. In the near term, ILL expects to site transfer two products (can take one month's time, as per the management) and subsequent uptick in the volume of existing products can lead to upside in the US business. Further, we also expect operating leverage to play out and positively impact EBITDA; ILL currently incurs fixed costs of Rs280mn-Rs300mn on this facility. ILL expects the unit to add ~Rs1.6bn to FY15E sales and maintain its long-term guidance of Rs5bn sales by the end of the third year post approval for the unit. We expect the US business to grow 94% in FY15E. ILL has filed for ~35 products in the US, of which 15 are approved (8 are commercialised).

We expect the stock to trade at a higher multiple: With improved visibility in its institutional business (as per the management, the AMFm, or affordable medicines facility for malaria, programme funding has been extended until 2016) and removal of overhang on the US business, we expect the stock to trade higher than its historical average of 14x. We have thus value the stock at 16xFY15E EPS of Rs47, 6% above Bloomberg consensus estimate. We have retained our Hold rating on ILL with a revised target price of Rs747 (from Rs702 earlier).

Source : Equity Bulls

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