1 April 2014
C
orner
O
ffice
Interaction with the CEO
the
Confident of achieving INR60b sales by FY18
Structural growth story; all segments contributing
IPCA Laboratories
We met IPCA's CMD, Mr Premchand Godha, who charted out the game plan towards
achieving its vision of INR60b sales by FY18. The meeting strengthened our conviction
in IPCA's potential.
Focus on backward integration/strengthening R&D capabilities will continue. IPCA
believes there is huge scope to reduce costs in APIs through technological
enhancements, though there is limited scope to reduce costs in formulations.
We believe the recent stock re-rating is likely to sustain on the back of strong
earnings growth forecasts for the next two years.
Mr Premchand Godha
CMD
Mr Premchand Godha, Chairman &
Managing Director, is a Chartered
Accountant. A first generation
entrepreneur, Mr Godha has 35 years
of experience in the Pharmaceuticals
industry. Under his leadership, the
company has achieved tremendous
growth in all spheres of activity. He
has steered IPCA to the forefront of
the Indian Pharmaceuticals industry.
Confident of achieving INR60b sales by FY18; focusing on further backward
integration/strengthening R&D capabilities:
IPCA's CMD charted the game plan
to achieve its vision of INR60b sales (~2x FY14 sales; implied CAGR of ~18%) by
FY18. IPCA believes it is very well placed to achieve its guidance based on
products filed till FY14 alone. Though the contribution of formulations would
increase, IPCA's underlying strength of backward integration will only be
enhanced in this process. IPCA is also strengthening its R&D capabilities with
recent hiring from top local companies. Key risk to this story is regulatory risk.
International generics to grow fastest; support from India, institutional and API businesses:
IPCA expects export
formulations to grow at a CAGR of 20%, India formulations to grow at a CAGR of ~15%, institutional business to
double to INR8b, and the API segment to witness 10% CAGR over FY14-18. In the US, IPCA's strategy is to target
old, mature products witnessing slow or negative growth. Approval of the Indore plant has eased capacity
constraints and is likely to result in strong growth in the US. In India, IPCA aims to grow ahead of industry, with a
shift in product mix. Its positioning is the strongest in institutional business, given its backward integration
capabilities.
To continue building facilities; to generate strong free cash flows from FY16:
IPCA has not been able to generate
strong free cash flows over the last few years despite its profits growing 3x over FY09-13. Given its focus on high
volume products and its strength being backward integration, IPCA will need to invest in building capacities. It is
likely to generate strong free cash flows from FY16.
Structural growth story; Buy:
We view IPCA as a structural growth story, with all business segments contributing
to growth. We expect IPCA to report 30% EPS CAGR over FY14-16, led by international generics. We reiterate
Buy,
with a target price of INR1,025 (16x FY16E EPS). IPCA is one of our preferred picks in the midcap healthcare space.
Stock info
CMP (INR)
828
Equity Shares (m)
126.2
52-Week Range (INR) 907/492
1,6,12 Rel Perf. (%)
-13/0/38
M.Cap. (INR b)
104.5
M.Cap. (USD b)
1.7
Financial and valuation summary
YeYear Net Sales
PAT
End
(INR m) (INR m)
03/13A 28,131
3,243
03/14E 32,937
4,756
03/15E 40,031
6,532
03/16E 47,063
8,056
EPS
(INR)
25.7
37.7
51.8
63.8
EPS
Gr. (%)
17.4
46.6
37.3
23.3
P/E
(X)
32.2
22.0
16.0
13.0
P/BV
(X)
6.7
5.4
4.3
3.4
RoE
(%)
23.1
27.3
29.8
29.0
RoCE
(%)
25.2
28.7
32.4
32.7
EV/
Sales
3.9
3.3
2.7
2.3
EV/
EBITDA
17.5
13.4
11.0
9.0
Alok Dalal
(Alok.Dalal@MotilalOswal.com);+91 22 39825584
Hardick Bora
(Hardick.Bora@MotilalOswal.com);+91 22 3982 5423
Investors are advised to refer through disclosures made at the end of the Research Report.
1

C
orner
O
ffice
Confident of achieving INR60b sales by FY18
IPCA's CMD charted the game plan to achieve its vision of INR60b sales (~2x FY14
sales; implied CAGR of ~18%) by FY18. IPCA believes it is very well placed to achieve
its guidance based on products filed till FY14 alone. Though the contribution of
formulations would increase, IPCA's underlying strength of backward integration will
only be enhanced in this process.
IPCA expects export formulations to grow at a CAGR of 20%, India formulations to
grow at a CAGR of ~15%, institutional business to double to INR8b, and the API segment
to witness 10% CAGR over FY14-18. In the US, IPCA's strategy is to target old, mature
products witnessing slow or negative growth. Approval of the Indore plant has eased
capacity constraints and is likely to result in strong growth in the US. In India, IPCA
aims to grow ahead of industry, with a shift in product mix. Its positioning is the
strongest in institutional business, given its backward integration capabilities.
Vision to double sales to INR60b by FY18
INR m
India formulations
International generics
International branded
Institutional business
API
Total Sales
FY14E
9,786
6,691
3,455
4,514
7,959
32,405
FY18E
17,414
16,398
8,706
8,000
12,319
62,838
CAGR
FY14E-FY18E (%)
15.5
25.1
26.0
15.4
11.5
18.0
Source: MOSL Estimates
the
Focusing on further backward integration/strengthening R&D capabilities
IPCA's R&D spend is 3.5-4% of sales. It expects substantial increase in R&D expenditure
over the next few years. Developing APIs with non-infringing process and development
of finished dosage forms will be key focus areas, along with development of NDDS
for domestic and international markets. IPCA has recently strengthened its R&D team
with hiring from top local companies.
R&D expenses to increase
Source: Company, MOSL
1 April 2014
2

C
orner
O
ffice
International generics to grow fastest; support from India, institutional and
API businesses
IPCA expects export formulations to grow at a CAGR of 20%, India formulations to
grow at a CAGR of ~15%, institutional business to double to INR8b, and the API segment
to witness 10% CAGR over FY14-18. In the US, IPCA's strategy is to target old, mature
products witnessing slow or negative growth. Approval of the Indore plant has eased
capacity constraints and is likely to result in strong growth in the US. In India, IPCA
aims to grow ahead of industry, with a shift in product mix. Its positioning is the
strongest in institutional business, given its backward integration capabilities.
International generics (19% of sales): Commercialization of Indore SEZ can lead to
massive growth
IPCA's International generics business encompasses Europe, US and Australasia. The
company acknowledges that it is a late entrant into the US market. Its strategy is to
target old, mature products witnessing slow or negative growth. IPCA believes if
costing is right (backward integration), it can succeed even in mature products.
IPCA has filed a total of 38 ANDAs with the US FDA, of which 17 have been approved.
It aims to file 8-10 ANDAs every year, including some sustained release formulations.
Currently, it has five partners in the US to sell its products and will start its own
distribution once it reaches critical mass.
In the past, IPCA faced capacity constraints in the US, as its large plant in Indore was
awaiting US FDA clearance. The plant got clearance in September 2013 and the first
batch from this plant got shipped last month. US FDA approval of the Indore plant is
likely to ease capacity constraints and result in strong growth in the US.
For EU and Australasia, IPCA plans to file dossiers that have already been filed in the
UK in other focus countries. Most formulations registered would be backed by its
own APIs. IPCA is looking at contract manufacturing arrangements in these markets
to boost growth.
the
US business growth trend
Europe business growth trend
Source: Company, MOSL
1 April 2014
3

C
orner
O
ffice
Australasia business growth trend
the
Source: Company, MOSL
International branded generics (10% of sales): Real potential yet to unfold
The key markets covered here are Russia/CIS, Africa, Asia and Middle East, and Latin
America. IPCA uses distributors to sell its products in these markets except Nigeria.
As is the case with the US, IPCA believes it will consider its own front end in these
markets once it reaches critical mass.
IPCA's focus remains on building brands in pain, CVS, CNS, anti-infective and anti-
malaria segments. It also plans to enter geographies like Mexico, Venezuela and
Columbia. IPCA believes the real potential of emerging markets is yet to unfold.
Russia/CIS business growth trend
Asia business growth trend
Source: Company, MOSL
Africa business growth trend
Source: Company, MOSL
1 April 2014
4

C
orner
O
ffice
India business (30% of sales): Aiming to grow ahead of industry, with improving product
mix
IPCA is one of India's top 20 healthcare companies, with a covered market share of
~5%. Anti-malaria, CVS and pain management therapies contribute ~60% of India
branded sales. IPCA will continue to focus on these therapies by deepening its product
offerings.
In the longer run, IPCA will look at using clinical research as a tool to launch innovative
combination formulations/NDDS. It will also look at in-licensing products to build
business in the promoted therapy. IPCA intends to grow ahead of industry in this
segment.
IPCA believes its India branded business can grow at 15% over the next few years.
Domestic Formulations revenue trend
Therapeutic mix for domestic formulations sales in 9MFY14
the
Source: Company, MOSL
Institutional business (14% of sales): Focus on products with backward integration to
protect margins
IPCA's institutional business is primarily focused on malaria, which accounts for ~95%
of the segment's sales. The drugs are largely sold in African countries, where the
incidence of malaria is very high. Sales are almost equally divided between AMFm
program, US donations and other tender business. The overall market is USD300m-
400m. Institutional business was initially not a long-term focus area, but with IPCA's
success in WHO programs, this business is now a strategic one.
The company supplies two products under WHO's malaria program - Arthemeter/
Lumefantrine (AL) and Amodiaquine/Artesunate (AA) tablets. IPCA's backward
integration gives it an advantage over other Indian and global competitors.
Institutional business is expected to generate INR4.5b in FY14, 15% growth. IPCA
believes this business can be scaled to INR8b by FY18.
IPCA is looking at supplying injectable Artesunate over the next two years. The market
size of this product is INR600m-700m, with only one competitor. IPCA believes that
the injectable Artesunate market has the potential to grow to INR5b-6b over the next
few years.
1 April 2014
5

C
orner
O
ffice
IPCA generates ~30% margins from the institutional business and believes that
backward integration benefits can result in sustainable margins of ~20%. IPCA's
philosophy would be to keep away from low margin, low technology businesses. It
may look at entering the TB category over the next few years.
Institutional business revenue trend (INR m)
the
Source: Company, MOSL
To continue building facilities; to generate strong free cash flows from FY16
IPCA has not been able to generate strong free cash flows over the last few years
despite its profits growing 3x over FY09-13. During this period, IPCA has invested
~INR10b in building capacities for both the international and domestic markets. For
FY14, IPCA has guided capex of INR3.5b-4b.
Given its focus on high volume products and its strength being backward integration,
IPCA will need to invest in building capacities. It is likely to generate strong free cash
flows from FY16.
Strong earnings growth driven by improving sales mix
Capex required to fuel growth
Source: Company, MOSL
1 April 2014
6

C
orner
O
ffice
Healthy free cash generation expected from FY16
the
Source: Company, MOSL
IPCA's manufacturing facilities
Location
Athal, Silvassa
HPB-Canada, WHO-Geneva
Ratlam, Madhya Pradesh
Kandla, Gujarat
Capsules & Dry Syrups
Silvassa
Dehradun, Uttaranchal
Indore (SEZ), Madhya Pradesh
Sikkim
Ratlam, Madhya Pradesh
Indore, Madhya Pradesh
Ankleshwar, Gujarat
Aurangabad, Maharashtra
Mahad, Maharashtra
Dosage Form
Formulations
Tablets & Capsules
Tablets, Liquids, Injectables& Ointments
Betalactum - Tablets
UK-MHRA, MCC-South Africa
Tablets & Capsules
Tablets & Cephalosporin Injectables
Tablets & Capsules
Tablets & Capsules
API
-
-
-
-
-
UK-MHRA, TGA-Australia, MCC-South Africa,
MCC-South Africa
Approvals/Inspections
UK-MHRA, US-FDA, TGA-Australia, HPB-Canada
WHO-GMP
UK-MHRA, US-FDA
GMP
US-FDA ,TGA-Australia, EDQM, Danish
Regulatory Authority, PMDA-Japan, WHO-Geneva
WHO-GMP
PMDA-Japan
WHO-GMP
GMP
Source: Company
Structural growth story; Buy
We view IPCA as a structural growth story, with all business segments contributing to
growth. We expect 25% CAGR in international formulation revenues over FY14-16,
led by branded formulations and the US business. For domestic formulations, growth
is likely to recover to 16%, while the institutional business is likely to record 15%
sales CAGR over FY14-16.
We expect IPCA to report 30% EPS CAGR over FY14-16, on the back of 20% revenue
CAGR, 60bp EBITDA margin expansion and reversal of MTM forex losses. Return ratios
continue to be strong, with RoCE of 29-33% and RoE of 27-29%, which reflect
conservative management strategy and efficient capital allocation.
The stock trades at 22.1x FY14E, 16x FY15E and 13x FY16E EPS. We value IPCA at 16x
FY16E EPS, as we believe it deserves higher valuations due to strong earnings CAGR of
30% over FY14-16 and high return ratios. IPCA is one of our preferred picks in the
midcap healthcare space. We maintain
Buy,
with a target price of INR1,025 (16x FY16E
EPS).
1 April 2014
7

C
orner
O
ffice
Income Statement
Y/E March
Net Revenues
Change (%)
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income - Rec.
PBT before EO Expense
Current Tax
Deferred Tax
Tax
Tax Rate (%)
Reported PAT
Net Profit
Adj PAT
2012
23,587
24.3
5,135
21.8
671
4,464
413
-408
3,643
754
127
881
24.2
2,762
2,762
2,762
2013
28,131
19.3
6,232
22.2
867
5,365
334
-488
4,543
927
372
1,299
28.6
3,243
3,243
3,243
2014E
32,937
17.1
8,157
24.8
1,014
7,143
238
-556
6,349
1,530
63
1,593
25.1
4,756
4,756
4,756
2015E
40,031
21.5
9,896
24.7
1,241
8,655
373
312
8,595
1,891
172
2,063
24.0
6,532
6,532
6,532
the
(INR Million)
2016E
47,063
17.6
11,869
25.2
1,473
10,396
373
577
10,600
2,332
212
2,544
24.0
8,056
8,056
8,056
Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Deferred liabilities
Total Loans
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Investments
Curr. Assets
Inventory
Account Receivables
Cash and Bank Balance
Loans & Advances
Curr. Liability & Prov.
Account Payables
Provisions
Net Current Assets
Appl. of Funds
E: MOSL Estimates
2012
252
12,288
12,540
932
5,326
18,798
13,386
3,945
9,441
945
341
12,547
6,699
3,491
122
2,235
4,475
4,099
377
8,071
18,798
2013
252
15,285
15,538
1304
5,234
22,075
15,791
4,748
11,042
1,292
90
14,545
7,410
4,178
582
2,374
4,894
4,351
544
9,651
22,075
2014E
252
19,090
19,343
1367
5,734
26,444
19,041
5,763
13,278
1,292
90
17,953
8,941
5,186
786
3,040
6,169
5,543
626
11,783
26,444
2015E
252
24,316
24,568
1539
5,734
31,841
22,791
7,003
15,787
1,292
90
22,168
10,865
6,519
1,091
3,694
7,497
6,736
761
14,672
31,841
(INR Million)
2016E
252
30,761
31,013
1751
5,734
38,498
26,791
8,477
18,314
1,292
90
27,611
12,767
7,660
2,843
4,341
8,809
7,916
894
18,802
38,498
1 April 2014
8

C
orner
O
ffice
Ratios
Y/E March
Basic
EPS (INR)
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Fixed Asset Turnover (x)
Debtor (Days)
Inventory (Days)
Working Capital Turnover (Days)
Leverage Ratio (x)
Interest Cover Ratio
Debt/Equity
2012
21.9
27.2
99.4
3.7
17.0
2013
25.7
32.6
123.1
4.7
18.1
2014E
37.7
45.7
153.3
7.6
20.0
2015E
51.8
61.6
194.7
10.4
20.0
2016E
63.8
75.5
245.7
12.8
20.0
the
37.8
8.3
4.6
21.4
0.4
32.2
6.7
3.9
17.5
0.6
22.0
5.4
3.3
13.4
0.9
16.0
4.3
2.7
11.0
1.3
13.0
3.4
2.3
9.0
1.5
24.0
24.1
23.1
25.2
27.3
28.7
29.8
32.4
29.0
32.7
2.9
54
104
123
2.7
54
96
118
2.7
57
99
122
2.8
59
99
124
2.8
59
99
124
10.8
0.4
16.1
0.3
30.0
0.3
23.2
0.2
27.9
0.2
Cash Flow Statement
Y/E March
2012
Oper. Profit/(Loss) before Tax
5,135
Interest/Dividends Recd.
-408
Direct Taxes Paid
-757
(Inc)/Dec in WC
39
CF from Operating incl EO Expense 4,010
(inc)/dec in FA
(Pur)/Sale of Investments
CF from Investments
Issue of shares
(Inc)/Dec in Debt
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
-3,315
68
-3,247
1
25
-413
-468
111
-744
18
104
122
2013
6,232
-488
-927
-1,119
3,698
-2,752
251
-2,501
0
-93
-334
-589
279
-736
461
122
582
2014E
8,157
-556
-1,530
-1,929
4,143
-3,250
0
-3,250
0
500
-238
-951
0
-689
204
582
786
2015E
9,896
312
-1,891
-2,584
5,734
-3,750
0
-3,750
0
0
-373
-1,306
0
-1,679
305
786
1,091
(INR Million)
2016E
11,869
577
-2,332
-2,378
7,736
-4,000
0
-4,000
0
0
-373
-1,611
0
-1,984
1,752
1,091
2,843
1 April 2014
9

Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement
to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been
furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates
or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its
affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or
employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates
or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness
for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision
based on this report or for any necessary explanation of its contents.
MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest
Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
IPCA
None
None
None
None
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or
will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible
for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to
law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to
which this document relates is only available to investment professionals and will be engaged in only with such persons.
For U.S.
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States.
In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state
laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein
are not available to or intended for U.S. persons.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional
investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major
institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended
(the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into
a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within
the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer,
MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst
account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors
Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore
to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Anosh Koppikar
Kadambari Balachandran
Email : anosh.koppikar@motilaloswal.com
Email : kadambari.balachandran@motilaloswal.com
Contact: (+65) 68189232
Contact: (+65) 68189233 / 65249115
Office address: 21 (Suite 31), 16 Collyer Quay, Singapore 049318
Motilal Oswal Securities Ltd
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com