IPCA Labs' Q2FY19 results (Outperformer) - Beat on most counts

Q2FY19 result highlights

• Consol revs came at Rs9.98bn vs est Rs8.8bn; +15% yoy. Domestic formulations grew +10% vs est of flat sales; H1 sales have grown 21% - best amongst peers. Most therapies barring Malaria have grown well
• Generic formulation exports have also recovered sharply – Rs1.6bn vs Rs1bn in Q1; we est Rs1.1bn. Most geographies, ex-UK, have contributed to the growth. Branded exports came at Rs832m – marginally below est
• Institutional sales stayed steady at Rs438m vs Rs415m in Q1. Mgt allayed fears on adverse impact of reduced institutional funding.
• COGS came at 31.4% vs est 32.5%. COGS has been aided by better product mix in domestic as well as exports along with currency. Gross profits came at Rs6.8bn vs est Rs5.95bn; Q1 was Rs5.8bn – GP surprise has driven the EBITDA. Overheads were marginally ahead of estimates due to higher remediation spends (Rs250m) and Rs60m GDUFA fees.
• EBITDA at Rs2bn vs est Rs1.5bn – driven by strong operating leverage; +36% yoy. EBITDA % - 20.4% (Q2FY18 -17.2%)
• PBT ahead of est at Rs1.4bn vs est Rs823m. PBT was impacted by Rs305m forex loss (in-line) primarily due to MTM loss on forex loans
• PAT ahead of est at Rs1.19bn vs est Rs642m.PAT partially  aided by tax rate of 15% vs est of 22%

Key positives: Higher GMs, higher API sales, lower tax rate

Key negatives: Lower export formulations revs  

Impact on financials: We have broadly maintained our earnings est

Valuations & view

With multiple challenges across all its business segments over the last 3-4 years, Ipca has been hit by the perfect storm. We see clear signs that the worst is finally behind with the steady improvement outlook across business segments with normalization of domestic business, re-empanelment by the Global Fund, stability in EM currencies and increased likelihood of resolution of FDA issues over next few quarters. Ipca has leveraged the tough times to sharply reduce fixed costs which will magnify the operating leverage once revenue growth resumes. With >Rs23bn branded formulation sales in FY20E, 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 with strong medium term earnings growth visibility. Maintain Outperformer rating on Ipca with a 24-month target price of Rs920 (18x FY21E EPS). Delay in FDA clearance for manufacturing units remains a key risk.