IPCA Laboratories' Q3FY20 results (Outperformer) - Another solid quarter; Lower other expenses aid profitability

Q3FY20 result highlights

• Ipca Q3 standalone revs came at Rs11.4bn; 20% growth yoy. Consol revs at Rs12.1bn vs est Rs12bn. Domestic formulations grew 15% yoy above est of 14% and better than most peers
• Formulations exports came above est at Rs3.5bn vs est Rs3.4bn (25% yoy); Q2 was Rs3.4bn; Generic formulations came at Rs 1.9bn (39% yoy) above est of Rs1.7bn, Institutional formulations below est at Rs478m vs Rs544m and branded formulations at Rs1.1bn (8% yoy) inline with est.
• API exports grew 25% inline despite no sales in the US; Domestic APIs grew 20% yoy to Rs532m vs est Rs650m
• Consol EBITDA came at Rs2.7bn vs est Rs2.5bn; 30% yoy. Consol EBITDAM (ex-OOI) at 23% vs est 21.4%; Q2 21.2%. This beat was due to significantly lower other expenses at Rs2.8bn vs est Rs3.2bn (Q2-Rs3.3bn); mgt cited ~Rs420m of seasonal charges in Q2.
• Tax rate 15.7% vs est 21%; Consol PAT at Rs2bn vs est Rs1.7bn.
• In Jan 20, IPCA received NCLT approval for purchasing ~1100 acres of land near Nagpur for Rs690m. It aims to build an intermediates facility to reduce dependence on China, and further integrate operations. It will further bolster Ipca’s long term cost competitiveness.

Impact on financials: We have increased FY20/21 EPS est by 8%/3% to build in higher API revenues and lower tax rates. We introduce FY22 est

Valuations & view

With 56% / 33% EBITDA growth in FY19 / 9MFY20, Ipca’s diversified business model anchored on cost competitive manufacturing and brand building has begun deliver on its potential. Ipca has leveraged the tough times to sharply reduce fixed costs which is magnifying the operating leverage with the resumption of revenue growth across segments. Resolution of FDA outstanding issues can add further tailwinds to growth from FY22 onwards. We estimate 29% EPS CAGR over FY19-22E despite limited contribution from US generics. With a 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 Rs1,518 (20x FY22E EPS). Ipca remains one of our preferred midcap picks.