MOSL: IPCA LABORATORIES (Buy)-Earnings driven by API sales/better operating leverage
IPCA LABORATORIES: Earnings driven by API sales/better operating leverage; Ready for USFDA inspection
(IPCA IN, Mkt Cap USD1.7b, CMP INR937, TP INR1145, 22% Upside, Buy)
- Healthy revenue growth across segments, except institutional anti-malaria business: Sales at INR10.8b (v/s est. INR9.6b) were up 23% YoY, led by API and exports (formulation). API grew 37% YoY to INR3b (30% of sales). Generics' exports grew 21% YoY to INR1.3b (13% of sales). Branded exports grew 17% YoY to INR916m (9% of sales). Domestic formulation sales grew 13% YoY to INR4.5b (46% of sales). Overall growth was dragged to some extent by 34% YoY decline in the Institutional (INR273m) segment.
- Better operating leverage offsets reduction in gross margins: Gross margins stood at 62.3%, contracting 550bp YoY/280bp QoQ, due to change in the product mix (share of API increased to 30% from 26% YoY) and marginal rise in raw material cost. EBITDA margin expanded 490bp YoY to 18.4% (v/s est. 19.6%), largely due to better operating leverage (lower other expenses/employee costs down 730bp/310bp YoY as % of sales). EBITDA at INR2b (v/s est. INR1.9b) was up 68% YoY. PAT for the company stood at INR1.3b (v/s est. INR1.2b), up 76% YoY, for the quarter.
- Key concall highlights: (1) On completion of the remediation measures, IPCA has invited the USFDA for inspection at its facilities under import alert. (2) Remediation cost for 1QFY20 was INR60m and IPCA guided this cost to INR100m for FY20. (3) IPCA has guided for the Institutional anti-malaria business to touch INR2.3-2.5b for FY20. (4) IPCA has maintained guidance of 100-150bp YoY expansion in EBITDA margin.
- Maintain Buy: We reduce our EPS estimate by 6%/4% for FY20/FY21 to INR43/INR52 to factor in the lower off-take of institutional anti-malaria business and increased raw material cost. We roll to 21x 12M forward earnings and arrive at price target of INR1,145 (unchanged). We remain positive on IPCA on the back of robust better-than-industry growth in domestic formulation, healthy outlook for the API business and gradual off-take in the UK business. Successful USFDA compliance would be a further potential upside, in our view. Maintain Buy.
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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