Ipca Laboratories
BSE SENSEX
36,240
S&P CNX
10,947
10 July 2018
Update
| Sector:
Healthcare
CMP: INR713
TP: INR825(+16%)
Buy
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Remediation work complete
Looking forward to USFDA inspection
We visited IPCA Laboratories’ (IPCA) API site at Ratlam, Madhya Pradesh to understand
the remediation work done by the management ahead of USFDA inspection. The invite
has been sent to USFDA in February 2018, which implies the company has completed
remediation measures to resolve import alert/warning letter issued by USFDA. The
company has also sent invites for its formulation units in October 2017 (Indore SEZ) and
June 2017 (Piparia), thus covering all the sites under import alert/warning letter.
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
Financials Snapshot (INR b)
2018
2019E
Y/E Mar
Net Sales
32.8
36.6
EBITDA
4.5
6.6
PAT
2.4
3.8
EPS (INR)
19.0
30.0
Gr. (%)
18.1
58.1
BV/Sh (INR) 213.0
238.5
RoE (%)
9.3
13.3
RoCE (%)
8.6
11.9
P/E (x)
37.6
23.8
P/BV (x)
3.3
3.0
IPCA IN
126
757 / 400
2/18/36
71.3
1.1
184.0
53.9
2020E
42.3
8.2
5.0
39.3
31.0
271.9
15.4
13.8
18.1
2.6
Shareholding pattern (%)
As On
Mar-18 Dec-17 Mar-17
Promoter
46.1
46.1
46.1
DII
23.4
25.0
21.7
FII
16.6
14.5
15.6
Others
14.0
14.4
16.6
FII Includes depository receipts
Stock Performance (1-year)
Ipca Labs.
Sensex - Rebased
750
650
550
450
350
Multiple customer and regulatory audits provide confidence to face USFDA
inspection:
IPCA has faced about 250 customer audits for regulated as well as
non-regulated markets in the last two years. It has also cleared inspections by
regulatory agencies like WHO-Geneva, German regulatory agency, Russian
regulatory agency, PMDA-Japan and health Canada. There are no issues
outstanding for any regulatory agency other than USFDA. Inspection by USFDA
is not scheduled yet. IPCA has brought significant changes in terms of
automation, culture, quality control/quality assurance, documentation, and
training to make its facilities USFDA compliant.
Anti-malaria business to revive in FY19:
Though Global Fund has completed
the process of selection for supplying anti-malaria medicines, it is yet to award
orders. However, ex-Global Fund, stable business continues. IPCA has guided
revenue of INR2b in FY19, up from INR1.5b in FY18 on the back of addition of
molecules and incremental business from Global Fund.
Other updates:
IPCA is awaiting resolution of regulatory issues of UK
distributor to restore normalcy in that business. It has guided that it would take
2-3 months for pick-up in UK business (~7% of FY18 sales). DF remains on track
to achieve 13-14% growth in FY19 on low base of FY18, incremental sales from
new molecules and higher traction in existing molecules.
Valuation and view:
We have assumed strong 13.5%/44% CAGR in sales and
PAT over FY18-20. We raise our target P/E multiple to 21x (from 20x earlier) on
back of enhanced visibility of regulatory resolution based on remediation work
done by the company, revival in DF and anti-malaria business. Accordingly, we
value IPCA at 21x FY20E EPS of INR39 to arrive at a price target of INR825 (v/s
INR785; 20x FY20E EPS earlier). Reiterate
Buy.
Kumar Saurabh – Research analyst
(Kumar.Saurabh@MotilalOswal.com); +91 22 6129 1519
Tushar Manudhane – Research analyst
(Tushar.Manudhane@MotilalOswal.com); +91 022 6129 1536
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Ipca Laboratories
Key regulatory highlights from interactions at site
IPCA has cleared regulatory inspections by authorities like WHO-Geneva,
German regulatory authority, Russian regulatory authority, PMDA-Japan and
health Canada in past one year in the past one year. It has received certifications
to supply medicines over next 2-3 years.
The company has upgraded its quality control (QC) labs by integrating high
performing liquid chromatography (HPLC) with software like LIMS (laboratory
information management system) to manage samples and associated data.
In addition, it has also implemented LES (laboratory execution system) by Biovia
that provides lab analysts with an electronic environment that eliminates paper-
based processes and automates interactions with methods, instruments and
supplies in a compliant and controlled way. IPCA has implemented LES for six
products and is in process of implementing it for 8-10 products. (It has 70-80
products in all from the Ratlam site.) This has helped reduce errors, saving time
and thereby improving productivity.
IPCA has also upgraded standard operating procedures (SOPs) and training
modules. Besides documentation, it has strengthened its system so that analysts
and operators follow SOPs without skipping/overriding any of the steps.
The company has also strengthened its internal audit and review team by
implementing track-wise system. It has a robust 3-tier system in place so that
the associated batch data is checked, analyzed and reviewed by analysts in QA,
QC before the batch is released from the site.
IPCA has a zero-discharge mechanism in place at site so that the surrounding
environment is least impacted by the production it undertakes.
Attrition has been less than 15% at this site, implying stability among
employees, smooth implementation as well as consistency of processes
required for regulatory compliance.
Exhibit 1: Regulatory inspections
Month of
Inspection
PMDA - Japan
Health Canada
CDSCO, West Zone-Mumbai (India)
Ministry of Industry and Trade of the Russian Federation -
Russia
LAGeSo, Berlin [German authority]
Ministry of Food and Drug Safety (MFDS) - Korea
April' 2018
November' 2017
September’ 2017
May’ 2017
April'2017
March’2017
Status
Facility and system is acceptable. Certification yet to
be received
Certification received and valid up to January 2021
Certification received and valid up to September
2019
Certification received and valid up to May 2020
Certification received and valid up to April 2020
Certification received
10 July 2018
2
 Motilal Oswal Financial Services
Ipca Laboratories
Other highlights
Global Fund is yet to award orders to respective companies like IPCA. However,
ex-Global Fund, stable business continues. IPCA has guided revenue of INR1.8b-
2b in FY19, up from INR1.5b in FY18 on the back of addition of molecules and
incremental business from Global Fund.
IPCA has received prequalification approval for combination of Artmether-
Lumefantrine dispersed tablet (DT) version from World Health Organization
(WHO). Subsequently, it has submitted applications in various countries. Based
on population, Nigeria would be the key market to tap for meaningful
opportunity. Also, the audit by WHO-Geneva relating to Artesunate injection has
recently been completed.
IPCA has guided that it would take 2-3 months for pick-up in UK business (4.2%
of FY18 sales), as its distributor is in the process of resolving regulatory issues.
DF remains on track to achieve 13-14% growth in FY19 on low base of FY18,
incremental sales from new molecules, and higher traction in existing
molecules. YoY growth has been 5.6% (as per AIOCD) for past three months
compared to 3% in FY18.
Capex for FY19 would be about INR1.3b, largely towards maintenance.
R&D spend would be INR1.4b for FY19, largely towards product development
and building pipeline for focus markets.
Valuation and view
We have assumed 13.5% sales CAGR and 44% PAT CAGR over FY18-20. We expect
strong margin expansion over the next two years, led by:
Higher operating leverage, as India business growth revives
Significant reduction in remediation cost from ~INR550m in FY18 (~1.6% of
sales) to INR250-300m in FY19
Rationalization of manpower by ~600 (~200 in marketing and ~400 in
manufacturing)
Re-start of WHO tender business from FY19 as well as addition of new
molecules
Other cost rationalization efforts, leading to lower SG&A and other expenses
We expect further margin improvement in FY20 on the back of ramp-up of US
business and approval of injectables for tender business
We raise our target P/E multiple to 21x (from 20x earlier) and arrive at a price
target of INR825 (INR785 earlier; 20x FY20E EPS). Reiterate
Buy.
Exhibit 2: One year forward P/E
80.0
60.0
40.0
20.0
0.0
P/E (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 3: One year forward P/B
5.6
3.9
P/B (x)
Avg (x)
61.7
40.2
24.0
7.9
4.0
5.1
3.9
Max (x)
21.6
2.2
0.5
3.0
2.1
1.0
2.8
Source: Company, MOSL
Source: Company, MOSL
10 July 2018
3
 Motilal Oswal Financial Services
Ipca Laboratories
Story in charts
Exhibit 4: Expect sales CAGR of 14% over FY18-20
Formulation (INR b)
API (INR b)
16.6
10.7
8.2
10.4
6.7
2.7
20.3
FY13
23.6
FY14
22.9
FY15
20.4
FY16
22.9
FY17
22.9
25.7
30.4
7.5
FY12
8.8
FY13
9.7
FY14
11.3
FY15
12.0
FY16
13.9
FY17
14.3
16.2
18.7
Exhibit 5: ~15% CAGR in domestic business over FY18-20E
DF Revenues (INR b)
16.4
15.3
Growth (%)
14.0
15.0
5.8
17.2
FY12
7.1
8.2
7.7
7.3
7.9
8.7
9.6
FY18 FY19E FY20E
FY18 FY19E FY20E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 6: EBITDA margin to pick up from FY19
EBITDA (INR b)
21.8
22.2
24.7
16.8
8.1
5.3
11.8
18.0
13.9
13.8
6.6
8.2
19.3
EBITDA Margin (%)
Exhibit 7: EPS to grow at 44% CAGR over FY18-20
Core EPS (INR/ share)
5.1
6.2
3.4
FY16
4.4
FY17
4.5
22.0
FY18 FY19E FY20E
Source: Company, MOSL
FY12
25.6
FY13
37.9
FY14
19.8
FY15
10.5
FY16
16.1
FY17
19.0
30.0
39.3
FY12
FY13
FY14
FY15
FY18 FY19E FY20E
Source: Company, MOSL
10 July 2018
4
 Motilal Oswal Financial Services
Ipca Laboratories
Financials and Valuations
Income Statement
Y/E March
Net Revenues
Change (%)
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income - Rec.
PBT before EO Expense
EO Expense/(Income)
PBT after EO Expense
Current Tax
Deferred Tax
Tax
Tax Rate (%)
Reported PAT
Less: Minority Interest
Net Profit
Adj PAT
Adj PAT growth (%)
2014
32,818
16.7
8,106
24.7
1,031
7,074
269
-500
6,306
0
6,306
1,357
167
1,524
24.2
4,782
-3
4,785
4,785
47.9
2015
31,418
-4.3
5,291
16.8
1,796
3,495
284
358
3,569
-42
3,611
747
272
1,019
28.6
2,592
49
2,542
2,501
-47.7
2016
28,850
-8.2
3,417
11.8
1,722
1,695
316
169
1,548
395
1,153
228
-42
186
12.0
967
35
933
1,328
-46.9
2017
32,106
11.3
4,448
13.9
1,730
2,718
241
226
2,703
0
2,703
533
142
675
25.0
2,028
0
2,028
2,028
52.8
2018
32,836
2.3
4,547
13.8
1,777
2,770
240
418
2,948
0
2,948
614
-102
511
17.3
2,436
42
2,394
2,394
18.1
2019E
36,587
11.4
6,586
18.0
1,905
4,680
226
430
4,885
0
4,885
977
122
1,099
22.5
3,786
0
3,786
3,786
58.1
(INR m)
2020E
42,285
15.6
8,161
19.3
1,977
6,184
254
430
6,359
0
6,359
1,272
127
1,399
22.0
4,960
0
4,960
4,960
31.0
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
2014
252
19,344
19,597
1471
4,379
25,447
19,321
5,785
13,536
1,649
92
16,827
8,476
4,495
763
3,093
6,656
5,950
706
10,171
25,447
2015
252
21,832
22,084
1743
8,286
32,113
25,463
7,459
18,004
2,672
162
17,285
9,266
3,530
1,248
3,242
6,011
5,471
540
11,275
32,113
2016
252
22,340
22,592
1565
6,691
30,848
22,121
1,628
20,493
936
258
17,230
8,374
4,459
1,755
2,641
8,069
7,245
824
9,160
30,848
2017
252
24,300
24,553
1705
5,290
31,548
23,508
3,350
20,158
621
1,358
17,458
8,822
5,002
359
3,276
8,047
7,141
906
9,410
31,548
2018
252
26,633
26,886
1580
4,731
33,196
24,969
5,127
19,842
418
869
20,027
8,806
6,023
1,506
3,693
7,960
7,029
931
12,068
33,196
2019E
252
29,851
30,103
1702
5,089
36,894
27,469
7,032
20,436
418
869
22,157
9,617
5,264
3,934
3,341
6,985
6,277
709
15,171
36,894
(INR m)
2020E
252
34,067
34,320
1829
5,501
41,650
29,969
9,009
20,959
418
869
27,477
11,115
6,084
6,418
3,861
8,073
7,254
819
19,404
41,650
10 July 2018
5
 Motilal Oswal Financial Services
Ipca Laboratories
Financials and Valuations
Ratios
Y/E March
EPS (INR)
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Fixed Asset Turnover (x)
Debtor (Days)
Inventory (Days)
Working Capital Turnover (Days)
Leverage Ratio (x)
Interest Cover Ratio
Debt/Equity
2014
37.9
46.1
155.3
5.9
15.4
2015
19.8
34.4
175.0
1.2
5.9
2016
10.5
21.0
179.0
0.0
0.0
2017
16.1
29.8
194.6
2.3
14.4
2018
19.0
33.1
213.0
2.9
14.7
2019E
30.0
45.1
238.5
4.5
15.0
2020E
39.3
55.0
271.9
5.9
15.0
18.7
4.6
2.8
11.5
0.8
36.0
4.1
3.1
18.3
0.2
67.8
4.0
3.3
27.7
0.0
44.4
3.7
2.9
21.3
0.3
37.6
3.3
2.8
20.4
0.4
23.8
3.0
2.5
13.8
0.6
18.1
2.6
2.1
10.9
0.8
27.2
22.3
24.9
2.7
50
94
105
12.0
10.1
9.8
2.0
41
108
116
5.9
5.5
5.3
1.5
56
106
94
8.6
7.5
7.1
1.6
56
100
103
9.3
8.6
7.7
1.6
66
98
117
13.3
11.9
11.7
1.8
52
96
112
15.4
13.8
14.7
2.0
52
96
112
26.3
0.2
12.3
0.4
5.4
0.3
11.3
0.2
11.5
0.2
20.7
0.2
24.3
0.2
Cash Flow Statement
Y/E March
Oper. Profit/(Loss) before Tax
Interest/Dividends Recd.
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
CF from Oper. incl EO Exp.
(inc)/dec in FA
Free Cash Flow
(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
2014
8,106
-500
-1,357
-339
5,910
5,910
-3,887
2,023
-1
-3,888
0
-854
-269
-738
20
-1,841
180
582
763
2015
5,291
358
-747
-619
4,282
4,324
-7,166
-2,842
-70
-7,236
0
3,906
-284
-152
-73
3,398
486
763
1,248
2016
3,417
169
-364
2,622
5,844
5,449
5,079
10,527
-96
4,982
0
-1,594
-316
0
-8,013
-9,923
508
1,248
1,756
2017
4,448
226
-535
-1,647
2,491
2,491
-1,072
1,420
-1,100
-2,172
0
-1,401
-241
-292
217
-1,717
-1,397
1,755
358
2018
4,547
418
-636
-1,510
2,819
2,819
-1,258
1,561
489
-768
0
-560
-240
-359
256
-903
1,147
359
1,506
2019E
6,586
430
-977
-675
5,363
5,363
-2,500
2,863
0
-2,500
0
359
-226
-568
0
-435
2,428
1,506
3,934
(INR m)
2020E
8,161
430
-1,272
-1,749
5,570
5,570
-2,500
3,070
0
-2,500
0
412
-254
-744
0
-586
2,484
3,934
6,418
10 July 2018
6
 Motilal Oswal Financial Services
Ipca Laboratories
NOTES
10 July 2018
7
 Motilal Oswal Financial Services
Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
Ipca Laboratories
*In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend.
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Disclosure of Interest Statement
Analyst ownership of the stock
Ipca Laboratories
No
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(including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including
those involving futures, options, another derivative products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy,
completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval.
MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform
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Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm
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Registration details of group entities.: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser:
INA000007100.IRDA Corporate Agent-CA0541. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS
(Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd. offers
Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
10 July 2018
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