Management Speak: IPCA Labs (Outperformer) - Growth momentum intact

Presented are key takeaways from our interaction with IPCA management. We met Mr A.K.Jain, Jt. Managing Director, Mr Pranay Godha, Executive Director, Mr Prashant Godha, Executive Director and Harish Kamath, Corporate Counsel and Company Secretary.

India - Positive outlook: Management believes the pain management (Zerodol) and CVS (CTD) segments will help IPCA achieve 1.5x outgrowth versus the Indian pharmaceuticals market. Zerodol, with Rs5bn sales currently remains the key growth driver with its unique selling proposition (USP) of significantly lower gastric irritation, enhancing its safety. The company aspires to achieve Zerodol sales of Rs10bn through market share gains and launch of new line extensions. The company’s second-largest therapy, cardiovascular (CVS) continues to do well, with its flagship brand CTD crossing Rs1bn sales in July.

US - Initiation of resolution process a positive: Ipca’s Piparia (Silvassa) formulations manufacturing unit received 3 observations from its USFDA inspection from 19-23 Aug 2019. Management is confident of satisfactorily addressing the queries raised by FDA. This is the first FDA re-inspection of any Ipca facility, since the import alert issuance 4 years ago. Management views this as a positive and believes it marks the start of the process in resolving pending FDA issues. Currently, there is no clarity on the timing of re-inspection of other 2 units at Ratlam and Pithampur (both in Madhya Pradesh).

APIs – momentum to stay: IPCA’s significant work in expanding filings across multiple new geographies over last few years aided outperformance in API over last few quarters. Management believes the benign macro environment will help sustain momentum in the segment.

Valuations & view

With EBITDA growth of 56% in FY19 and 40% in Q1FY20, Ipca has clearly turned the corner and is set to deliver steady topline growth. 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 outstanding FDA issues can add further tailwinds to growth FY22 onwards. We estimate 26% EPS CAGR over FY19-21E, despite limited contribution from US generics. With a diversified revenue mix and a solid API based manufacturing base, Ipca is one of the more robust mid-cap pharma business models in the industry. Maintain Outperformer rating on Ipca with a target price of Rs1,131 (20x FY21E EPS). Ipca remains one of our preferred midcap picks.