Company update: IPCA Laboratories (Outperformer) - Rising from the ashes

Ipca Laboratories Limited (Ipca) has been in the midst of a perfect earnings storm over FY14-17, with simultaneous headwinds across multiple business segments. We believe the worst is over for Ipca as: 1) Domestic formulations and branded formulation exports are normalizing and 2) Global Fund institutional malaria sales will resume from Q1FY19. Further, potential resolution of FDA issues by H2FY19 can drive meaningful growth to Ipca’s US generics and API exports FY20 onwards and add to Ipca’s medium-term revenue growth momentum. Ipca has leveraged the crisis to rationalize costs and accentuate operating leverage through revenue recovery. We estimate 16% revenue, 30% EBITDA and 37% PAT CAGR over FY18-21E. We reiterate our Outperformer rating on Ipca with a 24-month target price of Rs920 (18x FY21E EPS).

Broad-based revenue growth…: Abating disruptions in GST implementation and stabilizing forex fluctuations will enable steady 15% revenue CAGR in Ipca’s branded formulation business (domestic and exports) over FY18-21E to Rs27.2bn. We estimate 33% CAGR growth in malaria business to Rs3.5bn by FY21E on resumption of Global Fund supplies and approvals for injectable/dispersible formulations. Recovery in the UK business will boost Ipca’s non-US generics revenues at 13% CAGR over FY18-21E. Once Ipca receives FDA clearance, US generics too would grow to US$30m by FY21E (negligible currently).

…to accelerate earnings: Given Ipca’s underutilised and recently rationalized cost base, a pickup in revenues from FY19E onwards could deliver accelerated earnings growth. A sharp rise in Q2-Q3 profitability already reflects the change in trend. We estimate Ipca’s EBITDA to improve further by 590bps over FY18-21E to 20.4% in FY21E post 110bps yoy improvement in FY18E. A high operating leverage makes our assumptions sensitive to revenue growth.

Recreated growth platform in place: Strong API capabilities are core to Ipca’s diversified exports business model, which we believe is a major competitive advantage, given growing cost pressures in global generics. API strength will enable Ipca to regain lost ground in competitive generic markets like the US and UK, in our view. This combined with steady growth in branded formulations will help drive multi-year earnings growth for the company. We maintain our Outperformer rating with a target price of Rs920. Ipca is one of our preferred mid-cap picks. Delay in FDA clearance for manufacturing units remains a key risk.