6 June 2012
TP: INR500
Guides for healthy growth across segments; Early
USFDA approval of Indore SEZ key to ramp-up in US;
We met the management of IPCA Labs (IPCA IN, Mkt Cap USD0.8b, CMP INR340,
Buy). Key takeaways from the same:
Following a strong FY12, IPCA is set to do an encore in FY13 led by healthy
growth across business segments and benefit of favorable currency.
Though the management has not specifically guided for topline growth for
FY13, it has indicated healthy double digit revenue growth for all the major
business segments. API will continue to report single digit growth rate in
medium term due to increased internal consumption. Further, the company
has guided for 50bp improvement in margins for FY13 on the back of 200bp
improvement in FY12.
We expect a significant ramp-up in IPCA’s international formulations
revenues led by 35% CAGR for the US business and 24% CAGR in branded
formulations business. Also, the domestic business is expected to report
healthy growth in over next couple of years
Expect 27% EPS CAGR We expect IPCA to clock FY12-14 PAT and EPS CAGR of
27% on the back of 16% revenue CAGR coupled with margin expansion.
The stock is currently valued at 11.2x FY13E EPS and 9.5x FY14E EPS, and is at
25-50% discount to its historic and peer valuation.
Reiterate Buy with target price of INR500 (14x FY14E EPS).
India formulations - Likely to report robust growth in coming years led
by CVS, Pain management and cough & cold segments
After facing various headwinds in domestic formulation business in FY12,
IPCA seems to be back on healthy growth track and is expected to report
higher double digit-growth in this business over next couple of years.
IPCA’s India formulations business had reported muted growth of 8.2% in
FY12 due to: 1) Lower incidence of malaria in the country (IPCA is a leading
player in the anti-malarial market), 2) Divisional restructuring of the business
with the company forming 12 different focused divisions to ensure focused
product promotion and doctor coverage, and 3) Significant attrition in the

sales force.
However, the business has seen revival in growth in 4QFY12 with business
growing 14.7% led by key therapeutic segments of CVS and Pain
management. Management has indicated that, the domestic formulation
business is likely to report 18-20% YoY growth in FY13 partially due to low
base. Going forward, the management does not expect any significant
addition to existing field force of ~3,600MRs as the focus will be on
productivity improvement.
We are estimating slightly conservative growth of 16% in FY13 to take into
account rising competition in acute therapeutic segments and uncertainty
related to anti-malaria segment. We note that the company has recorded
22.5% CAGR in this business for the FY05-11 period and we view the lower
growth in FY12 as a temporary blip.
Indore SEZ – Early US FDA approval will lead to strong scale-up
IPCA has set up its Indore SEZ at a cost of INR2b and has been awaiting US
FDA inspection/approval for the past 2 years. This SEZ is an important
determinant of IPCA’s revenue growth in the US market as this SEZ is likely to
address to key issues for IPCA, viz., new product approvals and availability of
increased capacities (IPCA’s US business is currently facing capacity
The US FDA has recently inspected this SEZ. While the final US FDA approval
is still awaited, IPCA management does not expect any major hurdles in
getting the approval.
US FDA approval for this facility will be a positive trigger for IPCA as (1) it will
be able to launch new products in the US, and (2) undertake a site transfer
for already commercialized products to the new facility to take advantage of
the expanded capacity, thus driving strong growth and profitability of the US
business. The company has filed 25 ANDAs with USFDA and has received
approval for 12. It plans to file 8-10 ANDAs every year going forward.
We estimate this SEZ to contribute ~USD5m to IPCA’s topline for FY13.
6 June 2012

Management has indicated that at peak capacity utilization (likely in the next
3 years), the SEZ can generate sales of USD80-100m.
Institutional supplies: Anti-malarial formulation business attains critical
mass; expect 20% growth in FY13
In FY10, IPCA received WHO pre-qualification to supply Artemether-
Lumefantrine (an anti-malaria formulation) to the African continent. This is a
USD250m market with only 3 other players. Further, the company recently
received WHO pre-qualification for Artesunate-Amodiaquine and is the only
company apart from innovator, to get the approval. This is a USD50m market
for IPCA. These are lucrative product opportunities for the company with
significantly high EBITDA margins at ~30%.
We note that IPCA is the only fully integrated player in this product, and
hence enjoys significant advantage over other players in terms of ramping up
the business. Currently Novartis has the largest share in the institutional
tender business for the product.
IPCA's revenue from this product has increased from INR1.2b in FY11 to
INR3b in FY12. The management has guided for 20% revenue growth for this
business in FY13. The company has confirmed order book for next 7-8
Our revenue estimates at INR3.6b for FY13 and INR4b for FY14 effectively
factor in this expected ramp-up.
International formulations business (ex-institutional) to record 22%
CAGR for FY12-14
We expect a significant ramp-up in IPCA’s international formulations
revenues led by 35% CAGR for the US business and 23.7% CAGR in branded
formulations business led by strong growth in all three main geographies, viz,
CIS, Asia & Africa.
Pure generic supplies (regulated market formulations) are expected to
record 22% CAGR for FY12-14 led by two main factors in US: 1) New
approvals and launches, and 2) Availability of expanded capacities post the
US FDA approval for the SEZ.
European generic revenues are expected to record a more modest 13%
CAGR for FY12-14 due to pricing pressure. We note that the revenue from
Europe were impacted due to implementation of new packaging system.
However, the management indicated that the productivity is coming back on
Overall the international formulation revenues are expected to record 20.4%
CAGR for FY12-14.
6 June 2012

API business – Vadodara facility to expand capacities; expect single digit
growth over next 2-3 years
IPCA has received environmental clearance to build API plant at Vadodara. The
company is expected to start work very soon. In FY13, capex on this facility is
targeted at ~INR1.5b.
The facility is expected to commission only in FY14 after which the company can
start supplying APIs in domestic market and in semi-regulated markets.
However, it will take another 2-3 years to start supplying APIs to regulated
markets as the facility will have to get approvals from regulatory agencies.
We expect the business to report single digit growth till such time.
Valuation & outlook
IPCA is one of the better managed pharma companies in India with strong
positioning in domestic formulation business and growing presence abroad. The
company is likely to sustain its high profitability backed by backward integration
capabilities in API manufacturing.
The performance of the company will be driven by all the major business
segments like domestic formulations, international formulations and
institutional supplies.
Expect 27% earning CAGR: We expect IPCA to clock FY12-14 PAT and EPS CAGR
of 27% on the back of 16% revenue CAGR coupled with margin expansion.
EBITDA is expected to record 18.6% CAGR for FY12-14. EPS growth is higher than
EBITDA growth due to absence of large forex losses reported in FY12.
Further, despite INR5b capex over FY13-14 (to sustain growth), the company is
likely to record healthy return ratios and low gearing.
The stock is currently valued at 11.2x FY13E EPS and 9.5x FY14E EPS. The stock
trades at 25-50% discount to its historic and peer valuation.
Reiterate Buy with target price of INR500 (14x FY14E EPS).
6 June 2012

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6 June 2012