MOSL: IPCA LABORATORIES (Buy)-Mixed 4Q-Guidance of strong margin improvement

Ipca Laboratories: Mixed 4Q; Guidance of strong margin improvement

(Ipca IN, Mkt Cap USD1.0b, CMP INR674, TP INR785, 16% Upside, Buy)

• IPCA’s 4QFY18 revenue grew ~18% YoY to INR7.8b (est. of INR7.7b), primarily led by robust ~15% YoY growth in the formulation segment. EBITDA stood at INR1.1b (est. of INR1.6b), with the margins at 14% v/s 18.8% in 3QFY18 and 10% in 4QFY17. Sequential contraction in the EBITDA margin can be attributed to high other expenses (+600bp QoQ). PAT came in at INR513m (est. of INR883m). For FY18, sales, EBITDA and PAT stood at INR32.8b (+2.3%), INR4.5b (+2%) and INR2.4b (+18%), respectively.
• Margin improvement to be driven by multiple triggers: IPCA expects at least 200bp EBITDA margin improvement (~18-18.5% in FY19E v/s normalized margin of 16-16.5% in FY18). This will be primarily driven by (1) India business growth of low teens, (2) a significant reduction in remediation cost from ~INR530m in FY18 (~1.6% of sales) to ~INR150m in FY19E, (3) a reduction in manpower by ~600 (~200 in marketing and ~400 in manufacturing), (4) commencement of the WHO tender business from 2QFY19E and (5) other cost-rationalization efforts, which have lowered SG&A and other expenses.
• Earnings call takeaways: 1) Remediation cost to come down to ~INR150m in FY19. (2) Cost of some of the key raw material has gone up significantly due to supply disruption from China. (3) Current tax rate to be at MAT levels for the next 3-4 years. (4) Anti-malaria DT approval may come in one month; institutional business sales will start by 2Q. (5) Artesunate injectable approval – one audit of the plant is over and second one will happen in the next six months. (6) R&D guidance of ~4% of sales for FY19 (similar to FY18). (7) Employee cost will grow at 8-10% YoY in FY19.