IPCA Laboratories - Q2FY14 Update - CMP Rs.689, Maintain HOLD, Increased Target of Rs.748 - Sushil Finance

IPCA Laboratories Ltd. reported a 10.1% YoY growth in net sales in Q2FY14 on account of an 11.5% rise in its exports business & 8% growth in its domestic business. The company positively surprised on the EBIDTA margin front, which recorded a 452 bps YoY rise to 27.7%. However, a MTM forex loss to the tune of Rs. 399 mn impacted the reported net profit. The following are the key highlights of the results which are summarized below:

Key Highlights of Q2FY14

- Revenues grew by 9.8% YoY from Rs. 7713 mn in Q2FY13 to Rs. 8467 mn in Q2FY14. The company's domestic business which contributes ~38% to the sales of the company registered a growth of 8% whereas the export business registered a growth of 11.5%.

- Domestic formulations registered a subdued growth of 5% to Rs. 2762 mn due to trade margin issues prevailing in the market (policy related disruption), anti malarial segment de-growing by 14% (Business decline of ~Rs. 173 mn) & pricing related issue with one of its product in the CVS space (Pioglitazone - business decline of Rs. 40 mn). However, segments namely Pain management (20%), Dermatology (32%) & CVS segment (20%) recorder growth during the quarter. The company expects to record 15% volume growth in FY14E with no price growth. The pricing policy full year net impact is expected to be negligible with price reduction in NLEM products to be compensated by price hikes already taken in 2 products (8% & 19%) & 2 under review for price increase.

- Export formulations increased to Rs. 3626 mn in Q2FY14 from Rs. 3392 mn in Q2FY13 mainly on the back of a 32% growth in its international generic portfolio (US 26% & EU 19%) and a 12% growth in its branded portfolio. CIS region registered a de-growth of 16% since Q2FY13 saw business resuming to normal after the implementation of track & trace system in Q1FY13 visible from the fact that it grew 21% in H1FY14. However, its tender based Business registered a de-growth of 22% since a major tender worth Rs. 40 mn could not be shipped in the current quarter & US donation not placing any orders whereas it did sales worth $14 mn in H1FY14. The company has maintained its guidance for FY14E at Rs. 4500 mn with US donation sales expected to start from Q3FY14. Indore SEZ is expected to start production by Q4FY14 which help increase US revenues by Rs. 800-1000 mn in FY15E. The company is confident of filing ANDAs at a rate of around 10-12 per year.

- EBIDTA registered a strong growth of 31.2% to Rs. 2345 mn in Q2FY14 with Rs/$ realizations at Rs. 62.3/$ vs Rs. 55/$ in Q2FY13. EBIDTA Margins came in at strong 27.7% vs 23.2% due to product mix change, higher realizations on the export front & 200 bps positive impact of lower value inventory (2 months Inventory bought at Rs. 54-55, Material cost reduced from 40.3% in Q2FY13 to 33.4% in Q2FY14). However, we believe, the EBIDTA margin of 27.7% is not sustainable citing depletion of lower value inventory (200 bps impact) going ahead.

- Net Profit witnessed a growth of 3.4% amounting to Rs. 1294 mn in Q2FY14 whereas margins were at 15.3% mainly on the back of a forex loss to the tune of Rs. 399 mn vs a forex gain of Rs. 64 mn in Q2FY13. EPS was at Rs. 10.3 as against Rs. 9.9 in Q2FY13.

OUTLOOK & VALUATION

With the domestic formulation business expected to see a revival in the coming quarters, US business expected to receive a considerable boost by the USFDA approval for the Indore SEZ and strong traction expected in its institutional business (expected to garner Rs. 4500 mn in FY14E + expectation to reach revenues of Rs. 8000 mn eventually driven by portfolio expansion); we maintain our positive view on the stock. Also with the de-growth witnessed in Russia being a one time phenomenon, we believe Ipca's branded generics business will also add to the growth in a big way going forward. We have revised our estimates factoring in higher EBIDTA margins going forward, citing continuing favorable currency & an expected strong thrust on exports post the commercialization of Indore SEZ. We continue to recommend a HOLD on the stock with a revised TP of Rs. 748 based on 18x FY15E EPS of Rs. 41.6.

Source : Equity Bulls

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