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Research
IPCA Labs - Outlook robust, valuation upsides strong – initiate with BUY - Religare
Posted On : 2014-01-12 20:24:27( TIMEZONE : IST )
We initiate coverage on IPCA with a BUY and a TP of Rs 880. We like IPCA due to (a) sharp ramp-up in US sales (post Indore SEZ contributing from 1QFY15), (b) superior earnings growth (25% EPS CAGR vs. 20% for peers) led by margin expansion & (c) attractive valuations (trades at 20% discount to mid-sized peers). We expect re-rating led by earnings upgrades on faster domestic growth (from H2) & improved biz. mix driving margin surprise. Our TP (16x Dec'15E EPS, a 20% discount to sector) implies a 19% upside.
Formulations-led revenue growth: We forecast 18% sales CAGR over FY13-FY16E led by both domestic (16% CAGR, 32% of sales) and export (23% CAGR, 44% of sales) formulations. A ramp-up in US generics (aided by Indore SEZ contribution), sustained anti-malarial tender wins and new launches in branded markets brighten export growth prospects. Higher captive utilisation would limit growth in the lower-margin API biz (27% of sales) to 15%, thereby improving the overall revenue mix.
Domestic growth to rebound on improving productivity: Post one-time impact of the new pricing policy, IPCA's domestic growth to bounce-back (to 16% from 11% in 1H) over FY13-FY16 on (a) higher thrust on chronic segments like cardiac, pain, diabetes & (b) improving productivity of recently added field-force (25% of total).
Margin outlook firm: IPCA's EBITDA margins should to improve to ~24% (22.2% in FY13) on (a) rising contribution of high-margin US sales, (b) higher-than-expected margin-accretive anti-malarial tender supplies (14% of sales), and (c) below-expected impact of NLEM-listed products in the domestic market. We thus expect a 21% EBITDA CAGR over FY13-FY16E (faster than 18% sales growth in this period).
Earnings momentum to drive upsides: IPCA's valuation discount of 20% to mid-cap peers would narrow due to (a) rising growth visibility (25% EPS CAGR), (b) improving RoEs (26% in FY16E vs. 23% now) and (c) lower gearing (0.2x in FY16E vs. 0.4x now).
