MOSL: IPCA LABORATORIES (Buy)-Earnings driven by DF, API segments; on track to improve op. margin

Ipca Laboratories: Earnings driven by DF, API segments; on track to improve op. margin

(IPCA IN, Mkt Cap USD1.4b, CMP INR737, TP INR850, 15% Upside, Buy)

• DF, API sales drive earnings: IPCA's revenue grew ~20% YoY to INR8.5b (our estimate: INR8.4b), led by Domestic Formulation (DF; up 36% YoY to INR4b, 48% of sales) and API (up 27% YoY to INR2.2b, 26% of sales) segments. However, overall revenue growth was dragged by Generic (down 15% YoY to INR1b, 12% of sales) and Branded (up by a moderate 6% YoY to INR785m, 9% of sales) segments. Gross margin expanded 500bp YoY to 67.5%, led by the increased share of the relatively better-margin DF business. EBITDA margin came in at 16% for the quarter (our estimate: 16.6%; not comparable on a YoY basis, as margins in the base quarter were impacted by GST). Revenue growth, coupled with better operating margins, led to adj. PAT of INR885m (our estimate: INR756m) v/s a loss of INR202m in the year-ago period. Reported PAT was lower at INR655m due to a forex loss of INR230m.
• Earnings call takeaways: (1) IPCA is confident of maintaining gross margins at 1QFY19 level; however, inconsistency in the availability of key materials from China may lead to disruption in production. (2) Though unbranded generics sales came in at INR1b in 1QFY19, IPCA has maintained its guidance of INR5.4b for FY19. (3)  Remediation cost for 1QFY19 was INR60m. (4) On track to achieve prequalification for supplying Artesunate injection in FY19.