IPCA Laboratories - Out Performer - Karvy Stock Broking

Revenues in-line, negative margin surprise

- Pain management and anti-malarial products lead revenue growth: Ipca's Q2FY11 net revenues grew 20.5% y-o-y to Rs 5182.9 mn in-line with our estimates of Rs.5216.3 mn. Domestic sales grew 29.4% y-o-y to Rs.2219.4 mn higher than our estimates of Rs.2057.9 mn in Q2FY11. Domestic sales witnessed strong growth on the back of higher sales in its Pharma division (CVS+Diabetology products) (+32% y-o-y) and Intima division (anti-malarial products) (+41% y-o-y) during Q2FY11. Revenues in the export formulations business increased 27.1% y-o-y to Rs.1,751 mn primarily due to strong sales in its US business (+ 55% y-o-y). IPCA reported anti-malarial tender business of 264.5 mn during Q2FY11 vis-a-vis Rs.85.9 mn during Q2FY10.

- Higher staff and other expenses dents margins: IPCA's EBITDA margins were reported at 22.8% during Q2FY11 lower than our estimates of 23.6% for Q2FY11. Margins were impacted due to significant increase in staff expenses (+21.8% y-o-y) and Other expenses (+29.7% y-o-y) due to aggressive expansion of domestic field force and commercialization of Indore SEZ. Higher manufacturing cost due to increase in export freight also led to higher other expenses during the quarter. Profits for the quarter were higher at Rs940 mn (our estimates of 808mn) due to forex gain of Rs288mn.

- Upgrade the stock to Out Performer: We continue to maintain our revenue estimates for FY11 and FY12. However owing to lower material costs due to improved traction in the domestic formulations space and CIS space we upgrade our EBITDA estimates for FY11 from 21% to 21.9% and for FY12 from 21.1% to 22%. Consequently, we have upgraded our EPS estimates for FY11 by 11.6% to Rs.21.2 and for FY12 by 1% to Rs.24.4. We upgrade our target price by 5% to Rs.347 and upgrade our rating on the stock to Outperformer based on 14.2X FY12E.

Source : Equity Bulls

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