MOSL: IPCA LABORATORIES (Neutral)-Weak quarter-resolution of FDA issue key

Ipca Laboratories: Weak quarter; resolution of FDA issue key

(ipca IN, Mkt Cap USD1.1b, CMP INR489, TP INR480, 2% Downside, Neutral)

• 4QFY17 revenue of INR6.7b (+7% YoY) came in 16% below our estimate, primarily due to muted performance by the generic and domestic businesses. EBITDA margin contracted significantly to 10.2% (-480bp QoQ and flat YoY) due to muted sales and lower gross margin. Reported PAT of INR444m included the impact of deferred tax asset of INR237m in 4Q. For FY17 sales, EBITDA and Adj. PAT stood at INR32b (+11%YoY), INR4.4b (+30%YoY) and INR2b (+53%YoY) respectively
  
• Domestic/generic businesses deliver muted performance: India formulation sales grew ~11% YoY to ~INR2.8b. India business growth was impacted by the demonetization drive. Apart from this, NLEM and FDC ban impacted domestic revenue growth by ~4% and 2%, respectively. Management expects domestic business to grow at ~12-14% YoY in FY18 as the impact of demonetization is already fading. Export formulations segment declined ~10% YoY due to a fall in generics business by ~16% YoY to INR1b and in institutional business by 34% YoY to INR310m. Generic business declined due to weak EU sales growth.
  
• Update on regulatory resolution: IPCA management is planning to meet USFDA in Jun-17 to offer invitation for Piparia inspection. Invite for Pithampur inspection is expected by mid-3Q. Currently >90% of ANDAs are linked to API from Ratlam. Given that the remediation process at Ratlam will only get over by end-CY17, we do not expect full regulatory resolution before 2HFY19E.