IPCA Labs' Q3FY18 results (Upgrade to Outperformer) - Strong quarter; Worst is behind
Q3FY18 result highlights
- Revenues came in significantly higher at Rs8.6bn (14% yoy) ahead of our estimate of Rs7.9bn. Domestic formulations business grew 14% yoy (our est 9%). The like to like growth was 17%. Export formulations grew 17% yoy at Rs2.7bn ahead of our est of Rs2.3bn. APIs grew 18% yoy to Rs1.92bn broadly inline with our est of Rs1.95bn.
- GMs remained flat sequentially at 65.7% (-150bps yoy) ahead of est of 65%. Overheads stood lower by 4% qoq at Rs4bn (inline). Due to higher revenues and better operating leverage, IPCA reported highest EBITDA in the past 14 quarters at Rs1.6bn (+46%yoy) vs our est of Rs1.2m with higher margins of 18.8% (17.2% Q2) vs est of 15.4%.
- Other income came at Rs110mn (flat qoq) vs est of Rs50mn, while tax rate was lower at 14% vs est of 22%. IPCA reported profit of Rs1.06bn +155% yoy (vs Rs965mn in Q2) way ahead of our est of Rs597mn.
- Over last few quarters, Ipca has rationalised its employee base by ~600 with ~400 / ~200 people reduction in manufacturing / sales.
Key positives: Higher revenues and GMs, better operational performance
Impact on financials: We have increased our FY18/FY19 earnings estimate by 26%/22% and introduced FY20 estimates.
Valuations & view
With multiple and simultaneous 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. Q2-Q3 EBITDA performance underline the potential of the earnings recovery. 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. Upgrade to Outperformer with a TP of Rs753.
Ipca Laboratories is engaged in the manufacture, sale and export of pharmaceuticals and pharmaceutical formulations in the form of tablets and capsules, orals and liquids, injectables, basic drugs and intermediates, and psyllium husk. As of Mar 31 2003, Co. operated 4 manufacturing facilities in Ratlam, Indore, Kandla and Athal. Co. also maintained a corporate office, an international division, and a research and development center in Mumbai.
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