Event update: IPCA Laboratories (Outperformer) - Annual Report Takeaways

IPCA Labs recently released its FY19 Annual Report. Below are the key takeaways.

Robust operating performance with cost control: IPCA Labs had a strong performance in FY19 with a revenue growth of 15% yoy contributed by most segments, with APIs growing at 18% yoy, A tight control on overhead costs (barring sales promotion costs), enabled significant operating leverage during the year, leading to a margin expansion of 500bps to 18.8%. With remediation work completed, if the FDA approval of US plants comes through in FY20, further margin expansion will be visible.

Strong cash flow generation continues to pare debt: IPCA continued to generate strong free cash flows for the 4^th consecutive year, even as the company completed the ~Rs720m Bayshore acquisition, highlighting the management’s prudent cash flow management capabilities. IPCA generated operating cash flows of Rs4.8bn vs Rs3.4bn in FY18, leading to a strong FCF of Rs2.96bn vs Rs2bn in FY18. This has resulted in a significant reduction in net debt (from peak net debt of Rs8.7bn in FY15 to Rs4.77bn in FY18 and Rs1.83bn in FY19) and looks well set to be debt-free by FY20, despite nil contribution from the US. ROCE has meaningfully improved to ~15% from 8.3% in FY18.

Other operational highlights: The Company has started to receive orders for both dispersible and injectable formulations in the institutional malaria business. The formulations manufacturing site at Silvassa, Indore and the API site at Ratlam continue to be under USFDA import alert. The company has completed all remediation work and has submitted the response to FDA and will likely trigger a re-inspection. Also, in UK, issues are largely over as MHRA has cleared Ipca’s distributor to import products from the company and utilize its in-house QP to approve products.

Valuations & view

With 56% EBITDA growth in FY19, Ipca has clearly turned the corner and is now well set to deliver steady topline growth going forward. With positive growth outlook across all segments (barring US), we expect the margin improvement trend to continue, driving strong earnings growth. We estimate 26% EPS CAGR over FY19-21E despite limited contribution from US generics. With Rs26bn branded formulation sales in FY21E, diversified revenue mix and a solid API based manufacturing base, Ipca is one of more robust mid-cap pharma business models in the industry. Maintain Outperformer rating on Ipca with a target price of Rs1059 (19x FY21E EPS). Ipca is one of our preferred midcap picks.