7 August 2014
Update | Sector: Healthcare
Ipca Laboratories
BSE Sensex
25,589
S&P CNX
7,649
CMP: INR725
TP: INR916
Buy
US FDA issue a small bump in a structural story
Remediation measures underway; risk-reward favorable
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
IPCA IN
126.2
907/609
-18/-36/-26
105.6
1.8
Remediation measures are already underway, with resolution expected in six
months. IPCA is confident of regaining lost market share in the US on resumption.
The long-term story is intact. The management targets INR100b sales by 2020
with EBITDA margin expanding to 28%.
Analysis of three scenarios makes us believe that risk-reward is favorable.
Remediation already underway; expect resolution in six months
Financial Snapshot (INR Million)
2015E 2016E 2017E
Y/E March
Net Sales
35,818 41,818 50,889
EBITDA
Adj PAT
EPS (INR)
Growth (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
8,122 9,657 12,250
4,996 5,953 7,707
39.6
4
189
23.0
26.2
18.3
3.8
47.2
19
229
22.6
26.4
15.4
3.2
61.1
29
281
24.0
28.5
11.9
2.6
In our recent interaction with the CMD, Mr Prem Godha, and other senior
management personnel, we discussed IPCA’s action plan to get US supplies on
track. IPCA was already on course to automate its process and activities to
reduce human intervention. Since remediation measures are already underway,
the management expects a resolution in six months, based on its consultant’s
feedback. We believe IPCA is the only company to have voluntarily discontinued
production to this extent after receiving a form 483 from the US FDA and hence
drawing an analogy from US FDA actions for the industry players in the past
may not be prudent.
IPCA confident of regaining lost market share in US on resumption
Of the USD34m formulations sales in the US, ~75% are from three products
where IPCA has significant market share. There are five products where IPCA’s
partners hold majority market share. These are high volume products where
competition might find it difficult to match IPCA’s scale. IPCA remains confident
of regaining lost market share on resumption of supplies in the US.
Shareholding pattern % (Jun-14)
Jun-14 Mar-14 Jun-13
Promoter 45.9
45.9
45.9
DII
FII
Others
11.0
25.3
17.9
11.5
25.3
17.4
13.5
23.0
17.7
Aims to touch INR100b sales by 2020; EBITDA margin up to 28%
Mr Godha’s aim is to touch INR100b in sales by 2020, with scope to improve
EBITDA margin towards 28% (~23% in FY15E). IPCA’s philosophy would continue
to be to target mature products where it could enter with significant cost
competitiveness. Revenue growth would be driven by India, which is expected
to grow 3-4% ahead of the overall market, while emerging markets could
maintain high growth on a low base. API sales are likely to moderate.
Notes: FII includes depository receipts
Stock Performance (1-year)
Post scenario analysis, we believe risk-reward is favorable
IPCA has had a great execution track record. In our view, it is undergoing a
temporary disruption in its growth story. We maintain our Buy rating. We have
analyzed three scenarios that could unfold over FY15E-17, based on which we
see a potential upside of 30% in the next 18 months. However, if a warning
letter/import alert takes more than two years to resolve, there could be a
downside risk of 15%. We believe risk-reward is favorable.
Alok Dalal
(Alok.Dalal@MotilalOswal.com); +91 22 3982 5584
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.