IPCA Labs' Q4FY19 results (Outperformer) - Solid quarter; upbeat outlook

Q4FY19 result highlights

• Ipca Q4 revs came at Rs8.3bn vs est Rs8.7bn; 7% growth. Domestic formulations grew 10.2% yoy vs est 14.5%.
• Formulations exports came inline at Rs2.5bn; Q3 was Rs2.8bn; Although Generic and Institutional formulations came at Rs 1.18bn (-9% yoy) vs est Rs1.3bn and Rs408mn (-9% yoy) vs est Rs459mn, Branded formulations came significantly above est at Rs946mn (24% yoy) vs est Rs747mn;
• API exports grew 12% vs est 10% growth; 18% growth for FY19 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 this business segment.
• EBITDA came largely inline at Rs1.75bn vs est Rs1.79bn; -14% qoq. EBITDAM 20.9% vs est 20.6%; Q3 21.4%. Although staff costs were higher at 21.2% of sales, a significant reduction in other expenses kept EBITDA in line. GMs were 67.7% vs est 66.3%; -70bps qoq
• Tax rate 22.6% vs est 28.2%; PAT at Rs1.6bn vs est Rs1.34bn
• FY20 guidance – Rev growth of 12-14%; Margin improvement of 200bps and capex for FY20 at Rs2.2-2.3bn; Remain hopeful of going back to 25% EBITDA margins over next 2-3 years
• USFDA issues – Have completed all remediation work and will be shortly submitting the 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 Rs1059 (19x FY21E EPS). Ipca is one of our preferred midcap picks.