IPCA Labs' Q1FY20 results (Outperformer) - Solid quarter; API sales exports outperform

Q1FY20 result highlights

• Ipca Q1 standalone revs came at Rs10.1bn vs est Rs9.4bn; 18% growth yoy. Consol revs at Rs10.8bn. Domestic formulations grew 13% yoy inline with est and better than most peers
• Formulations exports came below est at Rs2.4bn vs est Rs2.7bn; Q4 was Rs2.5bn; Generic formulations came at Rs 1.3bn (-9% yoy) inline with est, Institutional formulations sharply below est at Rs273m vs Rs500m and branded formulations at Rs916m (17% yoy) vs est Rs942m.
• API exports grew 47% vs est 10% growth despite no sales in the US; Ipca is gaining from the API sector revival given its strong API core and mgt remains very optimistic on the outlook of API segment, especially on Losartan sales. Domestic APIs grew 9% yoy to Rs657m
• Standalone EBITDA stood at Rs1.95bn vs est Rs1.63bn; 40% yoy. EBITDAM 18.1% vs est 17.4%; Q4 20.9%. This beat in margins was due to overheads optimization despite lower GMs at 64.1% vs est 67.5% (Q4 67.7%). GMs stood low mainly due to a change in product mix
• Tax rate 21.4% vs est 23%; PAT at Rs1.3bn vs est Rs949m. Consol PAT at Rs1.3bn
• FY20 guidance – Rev growth of 12-14%; Margin improvement of 200bps and capex for FY20 at Rs2.2-2.3bn;
• USFDA issues – Submitted response to FDA. If there are no further queries, a re-inspection of the facilities will be the likely next step.

Impact on financials: We have marginally increased FY20/21 EPS est

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. 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. This is reflected in the 460bps EBITDAM expansion in FY19 with 15% revenue growth. With positive growth outlook across all segments (barring US), we expect this 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 Rs1131 (20x FY21E EPS). Ipca remains one of our preferred midcap picks.