IPCA Labs' Q3FY19 results (Outperformer) - Another strong quarter

Q3FY19 result highlights

• Ipca Q3 revs came at Rs9.47bn vs est Rs9.3bn; 11% growth. Domestic sales grew 10% yoy vs est 13.5%; while soft it was higher than reported by most peers
• Formulation exports came at Rs2.8bn – in line; 41% growth in branded formulations while institutional sales declined 30%; generic formulations were flat yoy. Generic sales have been impacted by implementation of serialization measures in EU.
• API exports grew 40% vs est 17% growth; 25% growth for 9mFY19; Ipca is gaining from the API sector revival given its strong API core
• EBITDA at Rs2.03bn beat est of Rs1.77bn; flat qoq; EBITDAM – 21.4% vs est 19%; Q2 – 20.4%. EBITDA beat driven by surprisingly low staff costs and healthy GMs. GMs were 68.4% vs est 68%; flattish qoq
• Staff cost came at Rs1.77bn (3% lower yoy) vs est Rs2.05bn. Mgt cited reversal of excess incentive provisions in India sales for lower staff cost. Other expenses (ex-forex) was Rs2.68bn vs est Rs2.49bn; Adj for Rs70m failure to supply penalty and Rs135m of remediation costs, other expenses would be even lower
• Forex gain Rs285m vs est Rs250m; Tax rate 18.6% vs est 20%; PAT at Rs1.6bn vs est Rs1.34bn

Key positives: Higher API sales, lower staff costs

Key negatives: Lower domestic sales  

Impact on financials: We have increased our FY19/20/21 EPS estimates by 23% / 11% / 8% respectively.

Valuations & view

Post a perfect storm, there are clear signs that the worst is finally behind Ipca with the steady improvement outlook across business segments with normalization of domestic business, pickup in API business, 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 >Rs26bn branded formulation sales in FY21E, 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. Post 83% EPS growth in FY19, we estimate 25% EPS CAGR over FY19-21e despite limited contribution assumption from US generics. Maintain Outperformer rating on Ipca with a target price of Rs984 (18x FY21E EPS). Ipca is one of our preferred midcap picks.