Post on 21-Mar-2018
Company Report Industry: Pharma
Surajit Pal (surajitpal@plindia.com) +91-22-66322259
Ipca Laboratories Remediation process done: ready to press restart button
March 09, 2018 2
Ipca Laboratories
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Contents Page No.
IPCA: An integrated play with diversified portfolio .................................................... 4
What went wrong for IPCA post FY14? ............................................................................................. 5
US generics – Request for re-inspection awaited .............................................................................. 6
Exhaustive remediation work completed— New dawn to emerge .................................................. 8
Status of filed ANDAs, pipeline .......................................................................................................... 9
What process changes have been made during remediation? ......................................................... 9
Way forward post resolution: Partnership model to continue ....................................................... 10
New, positive developments in tender business ............................................................................. 12
API to regain better growth with USFDA resolution ....................................................................... 17
Financials .................................................................................................................. 19
Revenue recovery expected FY19E onwards ................................................................................... 19
US revenues to resume with supply of older generics .................................................................... 19
International tender biz growth hinges upon approvals, resolutions ............................................. 20
EBITDA to gain faster on operating leverage ................................................................................... 20
Leverage, tax to decline with lower capex, higher operating leverage ........................................... 21
Improved business to improve return ratios ................................................................................... 23
Other key management guidance ................................................................................................... 23
Risks and Concerns ................................................................................................... 24
Delayed resolution from FDA .......................................................................................................... 24
New observations may affect international tender business .......................................................... 24
New observations may also lead to additional overhead ............................................................... 24
Systemic risk of new NPPA regulations ........................................................................................... 24
Valuations ................................................................................................................. 25
PL v/s Consensus ............................................................................................................................. 26
Ipca Laboratories
Company Report March 09, 2018
Rating BUY
Price Rs666
Target Price Rs837
Implied Upside 25.7%
Sensex 33,352
Nifty 10,243
(Prices as on March 08, 2018)
Trading data
Market Cap. (Rs m) 84,048.6
Shares o/s (m) 126.2
3M Avg. Daily value (Rs m) 244.1
Major shareholders
Promoters 46.21%
Foreign 13.89%
Domestic Inst. 25.51%
Public & Other 14.39%
Stock Performance
(%) 1M 6M 12M
Absolute 11.8 58.2 20.9
Relative 14.9 53.0 5.5
How we differ from Consensus
EPS (Rs) PL Cons. % Diff.
2019 27.6 28.9 -4.6
2020 38.4 38.4 0.0
Price Performance (RIC: IPCA.BO, BB: IPCA IN)
Source: Bloomberg
100
200
300
400
500
600
700
800
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
(Rs)
IPCA, after a long period of hibernation, they are beginning to see a recovery in all their key business verticals after the earnings reached a nadir with a loss of Rs176mn in Q1FY18. We believe this change to be reflected across the four verticals, namely:
US generics,
International tenders in non-WHO markets,
India formulations and
API
Management has invited USFDA to revisit the three facilities, which are banned to export drugs to the US since FY15. Unlike peers, IPCA completed exhaustive remediation work, including re-modelling of facilities and deployed three consultants for the same to get going. With a co-operative approach of the new commissioner and FDA’s track-record of setting up less tougher yardsticks for Oral and API plants, we expect re-approval of the facilities in FY19E. Re-initiation of anti-malarial tender business for private-fund program and invitation to USFDA for revisit of three plants are the key developments in recent times. With slew of major reforms by both, the Govt. and regulator, India formulations expect to achieve normalised sales in FY18E-20E. Extending learning curve post USFDA issues, IPCA commissioned new API plant in Baroda and de-risked exports of APIs that contribute 18% of sales in FY17.
Valuation - Initiate with ‘BUY’ recommendation, TP-Rs837: IPCA’s recovery began with 15% YoY growth of India formulations in Q3FY18 and reported net profit of Rs1,025mn. We expect the key fundamentals to improve gradually and set-off for bigger momentum once FDA issues resolve. Gross underutilisation of facilities related to US and anti-malaria drugs sets up opportunity for operating leverage, which will lead to faster growth of margins, EBITDA and PAT. To reflect inherent risk of US and International tender business, we assign PER of 22x (40% discount to EPS growth in FY17-20E) on FY20E earnings and derive TP at Rs837. We initiate coverage with ‘BUY’. Delay in attaining triggers for key events to be a major risk, while large orders from the private funds or faster FDA resolution to be catalysts for further upgrade.
Key financials (Y/e March) 2017 2018E 2019E 2020E
Revenues (Rs m) 30,927 31,890 35,219 41,068
Growth (%) 9.4 3.1 10.4 16.6
EBITDA (Rs m) 3,800 4,082 5,793 7,515
PAT (Rs m) 1,918 2,151 3,484 4,851
EPS (Rs) 15.2 17.0 27.6 38.4
Growth (%) 105.9 12.1 62.0 39.3
Net DPS (Rs) — — — —
Profitability & Valuation 2017 2018E 2019E 2020E
EBITDA margin (%) 12.3 12.8 16.5 18.3
RoE (%) 8.1 8.4 12.2 14.9
RoCE (%) 6.8 7.3 10.7 13.4
EV / sales (x) 2.9 2.8 2.5 2.1
EV / EBITDA (x) 23.6 21.6 14.9 11.3
PE (x) 43.8 39.1 24.1 17.3
P / BV (x) 3.4 3.1 2.8 2.4
Net dividend yield (%) — — — —
Source: Company Data; PL Research
Key financials (Y/e March) 2017 2018E 2019E 2020E
Revenues (Rs m) 30,927 31,890 35,219 41,068
Growth (%) 9.4 3.1 10.4 16.6
EBITDA (Rs m) 3,800 4,082 5,793 7,515
PAT (Rs m) 1,918 2,151 3,484 4,851
EPS (Rs) 15.2 17.0 27.6 38.4
Growth (%) 105.9 12.1 62.0 39.3
Net DPS (Rs) — — — —
Profitability & Valuation 2017 2018E 2019E 2020E
EBITDA margin (%) 12.3 12.8 16.5 18.3
RoE (%) 8.1 8.4 12.2 14.9
RoCE (%) 6.8 7.3 10.7 13.4
EV / sales (x) 2.9 2.8 2.5 2.1
EV / EBITDA (x) 23.6 21.6 14.9 11.3
PE (x) 43.8 39.1 24.1 17.3
P / BV (x) 3.4 3.1 2.8 2.4
Net dividend yield (%) — — — —
Source: Company Data; PL Research
Ipca Laboratories
March 09, 2018 4
IPCA: An integrated play with diversified portfolio
IPCA is a vertically integrated Pharma company, with India being a major contributor
to its revenues. Branded formulations, Generic formulations, APIs and
Intermediaries are its major business verticals. Domestic revenues and exports
contribute to 49% and 51% of revenues, respectively. Hence, IPCA’s business is well-
diversified, both geographically as well as product-wise.
Exhibit 1: Revenue Distribution Chart
Source: Company Data, PL Research
India formulations contribute to 44% of revenues, with 80% contribution from Pain
management (PMS), Cardiology (CVS), Diabetology, Anti-infective and Anti-malarial
drugs. Export formulations contribute to 33% of revenues with presence in key ROW
markets. South-East Asia, Russia/CIS, Latin America, Middle-East and Africa are
major destinations of IPCA’s branded generics (with own field force) and contribute
to 28% of exports (9% of revenues). IPCA’s generic business in EU and US as well as
tender business for institutional clients (anti-malarial drugs) together contribute to
72% of exports (22% of revenues). All the manufacturing facilities of IPCA are based
in India, including nine formulation and seven API plants across the country.
IPCA
(FY17)
API (23%)
India (5%)
Exports (18%)
Formulations (76%)
Exports (32%)
Generics (23%)
US (2%)
Non-US (16%) International
Tender (4%)
Branded (9%)
India (44%)
Others (1%)
Ipca Laboratories
March 09, 2018 5
Exhibit 2: Geographic distribution of export (Formulations+API) (%)
Geographies: FY12 FY13 FY14 FY15 FY16 FY17
Europe 32% 28% 29% 37% 38% 39%
USA 21% 21% 20% 17% 19% 16%
CIS 8% 8% 8% 9% 7% 7%
Asia 10% 13% 12% 12% 14% 15%
Africa 27% 27% 28% 20% 15% 17%
Australia 3% 3% 3% 5% 6% 6%
Total 100 100 100 100 100 100
Source: Company Data, PL Research
What went wrong for IPCA post FY14?
Issue 1 — cGMP issue with USFDA: USFDA raised concerns over IPCA’s cGMP
practice (Form 483 observations) in multiple plants including Ratlam (API),
Pithampur (Indore SEZ) and Piparia (Silvassa) in July 2014. IPCA voluntarily stopped
export of its drug to US in a quick response to comply with the guidance of the FDA.
The critical observations escalated to an Import alert in Q3FY15 for all the three
plants with a reprieve of exemption for four APIs from Ratlam and one formulation
of HCQS from Piparia. The exempted API contributed 85% of US revenues in FY15.
Exhibit 3: Chronicles of cGMP issues with USFDA in the three plants of IPCA
Date Events
Jul-14 USFDA issued Form-483 with 6 observations for API plant in Ratlam
Jul-14 IPCA voluntarily suspended exports of API and formulations for US markets except products with shortage issue in US
Nov-14 USFDA issued Form 483 with 6 observations for formulations plant in Indore
Dec-14 USFDA issued Form 483 with 5 observations for formulations plant in Silvassa
Jan-15 Ratlam API plant was issued Import Alert though exempted four products (HCQS, Propranolol hcl, Trimethoprim and Ondansetron)
Mar-15 USFDA issued Import Alert for two formulations plant - Silvassa (Piparia) and Indore (Pithampur) though exempted two products
Q2FY16 Received clearance from WHO for the Ratlam API facility
Feb-16 USFDA issued Warning Letters on all three plants: Ratlam (API), SEZ Indore (Pithampur) and Silvassa (Piparia)
Apr-16 The Global Fund declined to source anti-malarial drugs from suppliers having cGMP issues with USFDA
Q4FY17 The Global Fund has asked IPCA to participate in the request for information process for 2018-20 supplies as malarial drug prices shot up with absence of the largest global producer of malaria drugs
Jun-17 USFDA withdraws exemption list of four APIs and two formulations from Ratlam and Silvassa, except for API Chloroquine Phosphate (Ratlam)
Source: Company Data, PL Research
Issue 2 — Stoppage of Global Funds in tender business: After a strong revenue
growth of 4x (from FY11-14) to Rs4.4bn in FY14, IPCA’s institutional malaria business
from the Global Funds (UNITAID, Gates Foundation etc.) decreased as the
organisations declined to source medicines which used API from Ratlam plant which
had cGMP issue with USFDA. These global funds used to contribute to 60-65% of
IPCA’s tender business revenues of US$73m in FY14.
Ipca Laboratories
March 09, 2018 6
Issue 3 — Depreciating GBP, Euro, Brexit take toll on EU generic business: EU
contributed between 30-40% of IPCA’s export during FY14-17, of which, 70% was
from the UK. Brexit and resultant steep depreciation in GBP affected IPCA’s revenues
which declined 10% CAGR in FY15-17. The non-UK business of IPCA was also
impacted due to fall in the value of Euro since FY15.
Issue 4 — Steep fall in Rouble, EM currencies spoil branded generics in ROW: Steep
depreciation of Russian Rouble and currencies in LatAM also affected IPCA’s
revenues from ROW markets in FY16. IPCA’s revenues from CIS and Americas (non-
US) fell by 36% and 30% YoY, respectively, in FY16. Revenues from both the
geographies, however, declined by 17% and 20% CAGR in FY15-17.
Issue 5 — API draws collateral damage from USFDA, Global Funds embargo: With
18% of revenue, IPCA is one of the largest API exporters of India. It also reached its
highest revenue of Rs6bn in FY14 but import embargo by US and Global Funds in
malaria business impacted its growth afterwards. API exports of IPCA declined to 2%
CAGR in FY14-17.
Exhibit 4: Contribution of key revenue sources (%)
Major Segments
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
India
47% 44% 38% 37% 35% 42% 48% 49%
Formulations
38% 37% 32% 31% 30% 36% 43% 44%
API
9% 8% 6% 5% 5% 6% 5% 5%
Exports
53% 56% 62% 63% 65% 58% 52% 51%
Branded Formulations
8% 8% 9% 10% 11% 11% 8% 9%
US generics
4% 6% 7% 6% 7% 4% 3% 2%
Non-US Generics
14% 16% 13% 12% 14% 17% 16% 16%
Tender Biz (WHO, Global Fund)
5% 6% 13% 14% 13% 8% 5% 4%
API
20% 18% 17% 19% 18% 16% 18% 18%
Other
1% 2% 2% 2% 2% 3% 2% 2%
Gross Sales (excl Oth Op. Income)
100% 100% 100% 100% 100% 100% 100% 100%
Source: Company Data, PL Research
US generics – Request for re-inspection awaited
Our view: IPCA’s US generics business went into a tail spin from FY14. Though
initially it was due to the voluntary withdrawal of exports (since July 14) followed by
import alert of USFDA (Jan 15), IPCA’s US revenue declined by 35% CAGR in FY14-17.
US revenues are likely to decline further by 20% YoY to US$8.5mn in FY18E as FDA
withdrew exemption list (of five products) of import alert since Jun 17. We strongly
believe that IPCA’s slide in US revenues is to bottom-out in FY18E with acceptance of
formal request of re-inspection for all the three plants, currently banned under
import alert.
Ipca Laboratories
March 09, 2018 7
With 40 months of remediation work behind them and new co-operative approach,
we expect the USFDA visit and approval in FY19E. We believe re-approval of the
three plants of IPCA will not be as difficult as other Indian peers due to a)
manufacture of non-complex drugs in oral solids (OSD), b) Ratlam being API plant
and c) Pithampur and Piparia being new plants have small history of US exports.
While we expect US revenue growth at 21% CAGR on a small base in FY17-20E, there
could be a possibility of much higher growth in FY20E though visibility will be clearer
once resolution achieves.
Exhibit 5: US generic revenues poised to grow on expected resolution
-40%
-20%
0%
20%
40%
60%
80%
0.0
5.0
10.0
15.0
20.0
FY17 FY18E FY19E FY20E
Revenues (US$m) Gr (%) (RHS)
Source: Company Data, PL Research
Key US generics targeted post resolution: Management expects gToprol XL
(Metoprolol) approval post resolution to be the key driver for US growth. IPCA plans
to garner larger market share with benefits of captive API and economy of scale.
Currently IPCA is the largest/cheapest API producer of Metoprolol as well as supplier
to AstraZeneca (originator of Toprol). Overall, IPCA’s initial target (post resolution) is
to re-enter majority of current ANDAs, which were launched and traded with high
volume in US before the import ban. It also plans to file new ANDAs selectively in
sustained release and controlled substance drugs with bigger volume of demand
(Rx).
Ipca Laboratories
March 09, 2018 8
Exhibit 6: US generic revenues take toll due to import ban (FY12-17)
-60%
-40%
-20%
0%
20%
40%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
FY12 FY13 FY14 FY15 FY16 FY17
US Generics Revenue (US$m) Gr (%) (RHS)
Source: Company Data, PL Research
Exhaustive remediation work completed— New dawn to emerge
USFDA Inspection: With the completion of remediation process, IPCA invited USFDA
in August CY17 for re-inspection of its formulation plants in Piparia (Silvassa) and
Pithampur (SEZ Indore). Management also plans to invite the FDA for re-inspection
of its key API plant in Ratlam in Q4FY18. We, however, believe that resolution on
Ratlam unit to be the key for IPCA’s return to strong US growth as it targets volume-
driven older generics with vertical integration of a) APIs and b) lowest manufacturing
cost. Even in the current competitive horizon, when trend of consolidations among
the channel partners are at its peak, these two features are expected to help IPCA to
make re-entry in highly competitive older generics in US.
Exhaustive remediation work spread over 40 months: IPCA took more than three
years to complete the remediation work as FDA wanted IPCA to complete audit of
retrospective manufacturing/QC data of the five years prior to CY2015. With 22 units
and 70 products in Ratlam API plant, it was a huge task for the company to comply
with the demand of data-check (through a third-party consultant) of the last five
years as recommended.
Easier yardstick for API plant to be re-approved: While all ANDAs of IPCA are
vertically integrated, the clearance of Ratlam facility is critical for resumption of US
business. Ratlam being an API plant, and along with current trend of faster re-
approval of API plants of peers like Divis Lab and DRL, we concur the management’s
optimism that Ratlam has higher likelihood to reach resolution in CY18 (FY19E). New
ANDA approvals are likely to depend on resolution in Pithampur plant, while Piparia
is the key for production of current product portfolio of US market
The remediation costs were US$6-8mn in FY17 (~Rs500mn). Going forward, the
consultation cost would continue till these issues are resolved and could see
significant reduction in consultancy fees H2FY18E onwards.
Ipca Laboratories
March 09, 2018 9
Status of filed ANDAs, pipeline
With filing of four ANDAs since import alert raised in FY15, IPCA’s cumulative filings
are 48 ANDAs, of which, it received approvals for 18 ANDAs, while application of 30
ANDAs are pending with FDA. The import alert was raised on 11 SKUs including key
drug, HCQS.
IPCA has 54 cumulative DMF filings. The company indicated that while it continues to
work on new ANDA development, it would file the same only upon resolution of the
FDA issues. IPCA may need to rework the API processes on some of these filings to
make those drugs cost competitive.
Exhibit 7: History of ANDAs: Filing and Pending
History of ANDAs FY12 FY13 FY14 FY15 FY17
Cum. Filed 25 33 40 39 48
Cum. Approved 12 14 18 18 18
Pending pipeline 13 19 22 21 30
Source: Company Data, PL Research
In case of resolution in the near term, management plans to file 8-10 ANDAs in a
fiscal year and move up the value chain to complex products segment in the medium
term. IPCA has two products under 505(b) (2) route in its development pipeline and
is working on ophthalmology and hormonal specialities.
What process changes have been made during remediation?
Restructured QA team: IPCA’s quality assurance (QA) team has been restructured as
a part of its remediation work at plant. Its current organizational structure of one
President and two Vice Presidents has replaced previous structure of only one
President in charge of overall QA activities. There are also more suggested SOPs
(Standard Operating Procedure) at corporate level than SOPs at plant level, which
was exactly the opposite scenario before import alert took place. The more SOPs at
corporate level ensure more checks and balances from top management along with
efficient control management at plant level. The current structure will impart better
control for management in comparison to previous structure where management
used to have minimum control on QA activities though deem responsible for the
adverse outcome.
Work of consultants: As suggested by USFDA, IPCA appointed three consultants for
the remediation works since FY15: a) first consultant from US was appointed to
undertake a review of the existing process and on course correction, b) second
consultant (E&Y) appointed to do forensic analysis of its SOPs at the plant and
corporate level and c) third consultant (also from US) was appointed for reviewing
the data of the last 3-5 years. The work of third consultant’s work is currently
ongoing as it takes longer time to verify vast historical data at Ratlam.
Ipca Laboratories
March 09, 2018 10
Costs of remediation works: IPCA paid third-party consultant fees of Rs700-800mn
(US$12mn) in addition to the remediation costs of works at plant (US$20-25mn) in
the last three years of remediation process. The remediation works at plant site is
related to architectural alterations, construction modifications and new software
installations. IPCA paid consultancy fees of Rs40mn in H1FY18 and has guided for an
annual consultancy fees of US$1-2m in operating costs from now on as the
management decides to pay enduring focus on frequent update of its key personnel
through third-party consultant on global best practices followed in plant
management.
Exhibit 8: List of Plant Infrastructure
Location Dosage Forms Regulatory approval
Athal (Silvassa) Formulations: Tabs, Caps UK MHRA, TGA-Aus, MCC-SA, HPB-Canada, WHO-Geneva
Ratlam (MP) Formulations: Tabs, Liquids, Inj, Ointment MCC-SA
API US FDA, TGA-Aus, EDQM, PMDA-Japan, WHO-Geneva, Denish Reg Auth,
Kandla (Gujarat) Formulations: Betalactum-Tabs, Caps, Dry Syrups
UK MHRA, MCC-SA
Silvassa (Piparia) Formulations: Tabs, Caps US FDA, UK MHRA, TGA-Aus, HPB-Canada
Dehradun (Uttaranchal) Formulations: Tabs, Inj (Cephs) WHO-GMP
Indore-SEZ (MP-Pithampur) Formulations: Tabs, Caps US FDA, UK MHRA
Indore API WHO-GMP
Pithampur-Dhar (MP) Formulations: High potency OSD WHO-GMP, INVIMA Colombia
Tarapur-Palghar Formulations: Tabs India GMP
Sikkim Formulations: Tabs, Caps India GMP
Ankleshwar (Gujarat) API PMDA-Japan
Nandesari (Gujarat) API WHO-GMP
Aurangabad (Maharashtra) API WHO-GMP
Mahad (Maharashtra) API India GMP
Renu (Gujarat-Tehsil Padra) API India GMP
Source: Company Data, PL Research
Way forward post resolution: Partnership model to continue
IPCA continues to pursue partnership model to distribute its products in the US. Its
existing tie-up with Ranbaxy (now Sun Pharma) will continue even after resolution of
FDA-infested plants. With current tie-up for distribution of 40 products in US,
management is not keen to establish its own sales & distribution team in US due to
adverse cost-benefit outcome. IPCA shared partial profit with Sun Pharma along with
payment of marketing fees for distribution of its products in US.
With growing consolidation and cartelisation among channel partners in US, IPCA
may consider joining larger cartel for direct supply agreements if it benefits from a)
assured larger volume off take, b) higher capacity utilisations and c) sizeable
operating margin. This could well suit its future strategy along with current
partnership model, given that it could leverage a) benefits of scalability with lower
manufacturing costs and 2) gain and sustain market share in comparably stable price
of generics.
Ipca Laboratories
March 09, 2018 11
With major changes in market dynamics of US generics, IPCA sets yardstick of a) high
volume of demands and b) compulsory backward integration for launching
molecules (old and new) in US post resolution of plants. The company being a late
entrant in US, it is imperative for it to leverage low-cost captive APIs to sustain
competitive intensity and rapid price erosion.
Institutional malaria business—Recovery underway
IPCA received tender orders from large global funds in the non-WHO segment. Based
on the positive development in private-funds tender business, IPCA’s revenue from
anti-malaria drugs to increase by 33% CAGR to US$47mn in FY20E. IPCA’s revenues
were Rs1.3bn in FY17 and expected to reach Rs3.1bn in FY20E. IPCA received
revenue of Rs550mn from tender business in H1FY18. Our estimates are with
cautious optimism though IPCA may outperform our estimates once orders from
large funds start seeing momentum return to the earlier levels.
Exhibit 9: Re-entry in private market to drive International Tender Business
-20%
0%
20%
40%
60%
80%
100%
120%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
FY17 FY18E FY19E FY20E
Tender Business (Rs m) Gr (%) (RHS)
Source: Company Data, PL Research
Genesis of non-WHO market: Along with WHO’s tender business, IPCA also actively
participated in tender program of large funds for anti-malaria programme such as
The Global Fund, VPP and AMFm. Overall, its anti-malarial formulations are supplied
to the program of multi-lateral organisations such as UNICEF, WHO, IDA, Mission
Pharma, PSI, SCMS, MSF, MEG and Ministries of Health in Africa.
Current anti-malaria portfolio: IPCA’s current anti-malaria portfolio comprised of
two pre-qualified conventional drugs—combination of Artemether and Lumefantrine
(20/120mg Tabs) and co-blister pack of tablets of Artesunate (50mg) and
Amodiaquine (153.1mg). IPCA also supplies APIs of anti-malarial drug to global
pharma majors such as AstraZeneca, Pfizer, Bayer, Sanofi Aventis, Dafra, Mepha, and
Parke Davis. IPCA stopped supplies of Artemisinin based oral monotherapies among
anti-malarial drugs.
Ipca Laboratories
March 09, 2018 12
Ripple effect of USFDA Import Alert: While WHO-tender order remains stagnant in
offtake of volumes, The Global Fund (US being the largest contributor) declined to
offtake from IPCA from FY15 onwards as the organisation disallowed suppliers with
FDA-related issues in its anti-malaria program. This had led to decline in tender
business to Rs1.3bn (US$20mn) in FY17, as IPCA currently supplies to WHO tender
and individual tender orders of sovereign countries.
Exhibit 10: Non-WHO Tender revenues get collateral damage on FDA ban on US generics
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
-
10
20
30
40
50
60
70
80
FY12 FY13 FY14 FY15 FY16 FY17
Tender Business (US$m) Gr (%) (RHS)
Source: Company Data, PL Research
New, positive developments in tender business
Future of anti-malaria business: IPCA is awaiting approval for pre-qualifications of
two new formulations: a) Artesunate inj and b) combination of Artemether and
Lumefantrine dispersible tablets, for its participation of global tender business.
Management expects approvals in H1FY19E and plans to participate in tender of the
two comparatively new drugs in FY19E-20E. The filed dossier of injectable requires a
site inspection of IPCA’s new injectable facility. Approvals of the two new products
will provide fillip to dwindling malaria business from the existing portfolio. There is
limited competition between Novartis and Ajanta Pharma in tender business of
dispersible tablet. IPCA especially plans to target larger market share of dispersible
tablets as soon as supplies to The Global Fund restores.
Formulation exports: Gradual recovery with stable currencies
IPCA has both branded and generic business in non-US formulation exports, which
contributes to 25% of the company’s revenues. While it exports branded drugs in
CIS, Africa, Asia and Latam, IPCA’s major business in UK, Australia and New Zealand
are generics. Other key markets for non-US generics are Germany, Netherlands and
Belgium. IPCA’s both branded and generic formulation exports have been impacted
with volatile currencies since FY15.
Ipca Laboratories
March 09, 2018 13
Exhibit 11: Volatile currencies impact flow of export formulations
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY12 FY13 FY14 FY15 FY16 FY17
Export Formulations (Rs m) Gr (%) (RHS)
Source: Company Data, PL Research
Branded formulations: Branded formulations contribute 9% of IPCA’s revenues with
more than 25% operating margin. IPCA promotes more than 60 branded
formulations in 40 ROW markets with 500 dedicated field forces for doctors and
end-users. The key markets are Russia, Brazil, Mexico, Nigeria and Franco-German
Africa. IPCA markets key drugs in anti-infective, PMS, CVS, CNS and anti-malarial
therapeutic areas.
Exhibit 12: Stable currencies in ROW offer growth, profitability in Branded Formulations
0%
5%
10%
15%
20%
25%
0
500
1000
1500
2000
2500
3000
3500
4000
4500
FY17 FY18E FY19E FY20E
Branded Formulations (Rs m) Gr (%) (RHS)
Source: Company Data, PL Research
Aided with stabilized Rouble and other key currencies, IPCA’s management plans for
larger focus in branded formulation exports in the light of a) sizeable growth
prospects, b) better gross margin (20-25%) and c) incremental shift of R&D to ROW
markets due to FDA-related issues in US. We estimate 12% CAGR in branded
formulation revenues of Rs4bn in FY20E from Rs2.9bn in FY17. Branded formulations
reached its peak revenues of Rs3.4bn in FY15 with 22% CAGR in FY11-15. The growth
trajectory was however interrupted due to volatile currencies of Rouble and other
key EM currencies in CIS and ROW markets since FY15.
Ipca Laboratories
March 09, 2018 14
Exhibit 13: Rouble, Latam currencies take toll on Branded formulations (FY14-17)
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
FY12 FY13 FY14 FY15 FY16 FY17
Branded Formulations (Rs m) Gr (%) (RHS)
Source: Company Data, PL Research
Non-US generics: Revenue contribution of non-US generics was 16% in FY17. With
14% CAGR in FY11-15, the non-US generics business reached its peak revenues of
Rs5.2bn (US$84mn) in FY15, driven by new product launches and appreciation of
GBP v/s INR. With volatile Euro and declining GBP v/s INR since Q4FY15, IPCA’s
realisations in non-US generics declined by 1% CAGR in FY15-17.
Exhibit 14: Non-US Generics to have moderate growth on Brexit, Euro
0%
2%
4%
6%
8%
10%
12%
4800
4900
5000
5100
5200
5300
5400
5500
5600
5700
FY17 FY18E FY19E FY20E
Non-US Generics (Rs m) Gr (%) (RHS)
Source: Company Data, PL Research
EU contributes 70-75% of non-US generic sales, of which, UK accounts more than
70% of revenues. There has been challenging scenario in the growth UK sales volume
due to rising competition. IPCA’s EU growth in FY16 was affected due to supply-side
issues. It recovered quickly with 14% YoY growth in FY17. While challenging
scenarios such as Brexit could limit growth in the near term, we expect gradual rise
in revenues in FY19E onwards and estimate 3% CAGR in FY17-20E due to a)
geographic expansion, b) product launch and c) incremental growth in third-party
CMO business.
Ipca Laboratories
March 09, 2018 15
Exhibit 15: Depreciation of GBP being played a major role for decline in non-US Generics
-20%
-10%
0%
10%
20%
30%
40%
0
1000
2000
3000
4000
5000
6000
FY12 FY13 FY14 FY15 FY16 FY17
Non-US Generics (Rs m) Gr (%) (RHS)
Source: Company Data, PL Research
India formulations: Lower systemic risk to restore growth on track
IPCA’s India formulations grew at 12% CAGR in FY11-17 on growing share in chronic
therapeutic segments, judicious product selection, product launches and expansion
of field forces. The company’s domestic growth, however, was intermittently
disrupted by multiple factors: lower anti-malaria sales, impact of pricing policy, ban
on FDC drugs, demonetisation and GST implementations.
Exhibit 16: Therapeutic contribution in FY11
CVS & Anti-diabetics
27%
NSAID28%
Anti Malarials17%
Anti Bacterials8%
GI products6%
Neuro Psychiatry (CNS)4%
Cough & Cold preparations
4%
Dermatology4% Neutraceuticals
1% Others1%
FY11
Source: Company Data, PL Research
Exhibit 17: Therapeutic contribution in FY17
CVS & Anti-diabetics
21%
NSAID41%
Anti Malarials12%
Anti Bacterials6%
GI products4%
Neuro Psychiatry (CNS)3%
Cough & Cold preparations
5%
Dermatology4%
Urology2%
Neutraceuticals1%
Others1%
FY17
Source: Company Data, PL Research
Ipca Laboratories
March 09, 2018 16
Our view: IPCA’s M9FY18 sales declined by 1% YoY due to weaker anti-malaria drug
sales and pre-GST slowdown. The new taxation regime also increases tax incidence
from 8.9% to 12% as well as different base for comparison of growth (i.e. the sales in
Q3/M9 FY18 were net off GST, while it were gross sales in Q3/M9 FY17) as we shift
to GST from excise duty and VAT. The comparatively lower incidence of malaria in
M9FY18 is likely to reduce revenues from anti-malaria drugs to Rs1.1bn in FY18E
from Rs1.8bn in FY17. There could also be a possibility to write-off unsold inventory
(manufactured before July 2017) and cleared off the book in H2FY18E. While
management is hopeful to recover loss of sales (due to GST implementation) in
H2FY18E, we remain cautiously optimistic with 10% CAGR in FY17-20E on the back of
a) line extensions and drugs with new delivery mechanisms, b) normal year in anti-
diabetes, NSAIDs and CVS and c) launch of in-licensed products. IPCA, however, has a
possibility to outperform our estimates with higher incidence of malaria and
normalized sales of key therapeutic areas in H2FY18E.
Exhibit 18: Normalised years of sales expected for India Formulations in FY19E-20E
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
4000
8000
12000
16000
20000
FY15 FY16 FY17 FY18E FY19E FY20E
India Formulations (Rs m) Gr (%) (RHS)
Source: Company Data, PL Research
New strategy: While growing share of chronic therapy drugs helped in IPCA’s India
formulation growth, the acute therapy drugs, especially in PMS (pain management)
and Derma, remain the key focus for the company’s recent past. It has newly
entered in ophthalmology segment and plans to ramp-up its sales from current
revenues of Rs100mn p.a. IPCA plans to cater IPM with 13 marketing division with
4,000 reps. With reduction of headcount workforce by 500 headcount, the current
productivity of the marketing team is Rs2.5lakh/rep and reduction of headcounts
helps to increase average productivity by 10%. Current inventory days at channels
are 33 days in M9FY18, which used to be 40 days before GST implementations.
Management does not expect to regain similar inventory days with channel partners
in FY18E.
Ipca Laboratories
March 09, 2018 17
Exhibit 19: India formulations—Market reps, productivity, wholesalers key brands
FY12 FY13 FY14 FY15 FY16 FY17
Medical reps (Dom. Frml)
3,610 3,950 4,154 4,297 4,500 4,000
Revenue/Medical Rep (Rs in lacs)
13.20 15.14 16.75 17.55 19.51 24.24
Wholesalers 2,000+ 2,000+ 2,000+ 2,000+ 2,000+ 2,000+
Key brands HCQS, Lariago,
Rapither
HCQS, Lariago, Rapither-AB,
Zerodol-P
HCQS, Lariago, Rapither-AB,
Zerodol-P, Zerodol-SP
HCQS, Lariago, Rapither-AB,
Zerodol-P, Zerodol-SP
HCQS, Lariago, Rapither-AB,
Zerodol-P, Zerodol-SP
HCQS, Lariago, Rapither-AB,
Zerodol-P, Zerodol-SP
Source: Company Data, PL Research
Genesis: IPCA started as a producer of anti-malarial drugs and is a major player in
that segment. IPCA’s anti-malarial drugs are marketed through retail channel/brands
and controls 35% of the segment and these drugs contributes 12% of its domestic
revenues. IPCA never participated in low margin govt.-tenders of anti-malarial drugs
in India.
The company has improved its product portfolio over the years and grew its
positioning in chronic and specialty therapeutic areas. Its leadership in key
therapies such as NSAID, anti-diabetes and CVS contribute over 60% of India
formulation revenues
The current portfolio of products consists of 350 formulations including oral
solids, liquids, dry powder suspensions, injectables (dry and liquid)
IPCA services more than 200,000 physicians and covers more than 500,000
pharmacists through a network of 2,000 wholesalers
API to regain better growth with USFDA resolution
Envisaging approvals from key regulators across geographies for Baroda plant along
with resolution in Ratlam, we expect 7% CAGR in API exports in FY17-20E.
Management guided for 10% YoY growth in FY17-19E. With commissioning of
Baroda API facility in the recent past, IPCA also actively de-risks its API export
business gradually as Ratlam continues to be the only supplier for its API exports
since long. With a) Ratlam being the large API facility for exports, b) contributions of
18% of revenues and c) US and EU being key destinations, the USFDA import alert on
Ratlam plant resulted in a strong impact on revenues of IPCA. API exports grew at
22% CAGR since FY11 to reach its peak revenues of Rs6bn in FY14, while it declined
at 2% CAGR in FY14-17 post USFDA restriction of API exports to US.
Ipca Laboratories
March 09, 2018 18
Exhibit 20: API Exports to make turnaround post USFDA resolutions
0%
2%
4%
6%
8%
10%
12%
14%
0
1000
2000
3000
4000
5000
6000
7000
8000
FY17 FY18E FY19E FY20E
API Exports API Exports Gr (%) (RHS)
Source: Company Data, PL Research
Genesis: IPCA is one of the largest API exporters of India with key destinations being
US, EU, Africa, CIS and Latam. Its major products with large market shares globally
are Chloroquine Phosphate (antimalarial), Atenolol (CVS), Furosemide (diuretic),
HCQS (NSAID), Metoprolol succinate and tartrate (anti-hypertensive) and Pyrantel
salts (anti-thelmintic).
Ipca Laboratories
March 09, 2018 19
Financials
Revenue recovery expected FY19E onwards
IPCA’s current process of revenue recovery to reflect in FY19E onwards on the back
of a) resumption of US generics post resolution, b) renewing large supply of anti-
malaria drugs to The Global Fund and c) normalised sales of India formulations.
Adjusted revenues are expected to increase at 10% and 17% YoY in FY19E and FY20E.
With large unused capacities, IPCA has headroom to scale up in key business
verticals, which are impacted for multiple reasons since FY15 onwards.
Exhibit 21: Segmental revenues from key verticals
Segmental Revenues (INR m) FY14 FY17 FY18E FY19E FY20E
India 11,340 15,330 15,882 16,955 20,162
Formulations 9,694 13,886 14,510 16,542 18,692
API 1,646 1,444 1,372 1,413 1,470
Exports 21,450 16,157 16,493 17,800 21,531
Branded Formulations 3,461 2,870 3,020 3,383 3,992
US generics 2,257 693 556 695 1,216
Non-US Generics 4,563 5,096 5,159 5,314 5,579
Tender Biz (WHO, Global Fund) 4,377 1,300 1,316 1,511 3,058
API 6,002 5,659 5,984 6,462 7,238
Other 790 540 459 436 449
Gross Sales (excl Oth Op. Income) 32,790 31,487 32,376 35,755 41,693
Source: Company Data, PL Research
US revenues to resume with supply of older generics
We expect US revenues to resume (post resolution) on the back of continuous
supply of older approvals and new approvals of pending applications. The better
growth, however, expects to rise faster with key approvals like Toprol-XL and exports
of higher volume of older generics with larger Rx base. We currently estimate lower
(YoY) US sales in FY18E due to withdrawal of exception list (of FDA), while expect
US$11-20m sales in FY19E-20E with potentials of larger growth, in case resolution
achieves faster.
Ipca Laboratories
March 09, 2018 20
Exhibit 22: North America revenues & Growth
-40%
-30%
-20%
-10%
0%
10%
20%
30%
-
1,000
2,000
3,000
4,000
5,000
FY14 FY15 FY16 FY17
Formulations API Growth (%) (RHS)
Source: Company Data, PL Research
International tender biz growth hinges upon approvals, resolutions
While renewing supply of anti-malarial drugs to the private funds over three years,
we expect revenue growth from tenders to ramp-up with large orders from global
funds once it a) achieves resolutions (FDA) over three plants, especially in Ratlam
and b) receives pre-approval on two pending applications with WHO.
Exhibit 23: Therapeutic contribution from export formulations
Contributions of therapeutic groups: Export Frml FY11 FY12 FY13 FY14 FY15 FY16 FY17
CVS & Anti-diabetics 41% 31% 29% 31% 30% 31% 32%
NSAID 20% 18% 17% 17% 21% 25% 23%
Anti Malarials 19% 33% 37% 35% 24% 17% 16%
Anti Bacterials 11% 10% 9% 10% 11% 12% 13%
GI products 1% 1% 1% 1% 2% 3% 2%
Neuro Psychiatry (CNS) 3% 1% 1% 1% 3% 5% 5%
Cough & Cold preparations 1% 2% 1% 1% 2% 2% 1%
Anthelmintics - - - 3% 5% 3% 6%
Others 4% 4% 5% 1% 2% 2% 2%
Source: Company Data, PL Research
EBITDA to gain faster on operating leverage
With unutilised manufacturing capacity and marketing network, we expect IPCA’s
adj. EBITDA margin to increase to 18.3% in FY20E from 12.3% in FY17E. The company
is poised to utilise large operating leverage with improvement in key business
verticals including US generics, international tender and India formulations. The
plants, dedicated for multiple verticals, have been largely unutilised due to many
adverse events since FY15 and current developments suggest management plans for
turnaround in all three key verticals (US, India, International tender).
Ipca Laboratories
March 09, 2018 21
Exhibit 24: EBITDA, Growth and Margins
-60%
-40%
-20%
0%
20%
40%
60%
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
EBITDA EBITDA margin Gr (%) (RHS)
Source: Company Data, PL Research
The new business orders will conservatively increase revenues at 10% CAGR in FY17-
20E (with large potentials remain unaccounted) without meaningful capex in plant
infrastructure and sales network in export markets. This operating leverage to
increase EBITDA at 26% CAGR in FY17-20E and expand EBITDA margin to 18.3% in
FY20E in comparison to its peak adjusted EBITDA margin of 23.9% in FY14.
Leverage, tax to decline with lower capex, higher operating leverage
IPCA’s current utilisation is less than 50% across plant infrastructure mainly due to a)
nearly unutilised US-dedicated formulation plants, b) under-utilised Ratlam plant
and c) commissioning of Baroda new API plant. Management spent large capex of
Rs11.8bn in FY14-16 due to a) remediation of three USFDA plants, b) consultant fees,
c) acquisitions of two plants (Rs1.1bn in FY15) and d) new API plant in Baroda
(Rs3bn). The flow of investments reduces to maintenance capex as it spent Rs1.3bn
in FY17.
Exhibit 25: Capex and depreciation
0
1000
2000
3000
4000
5000
6000
FY15 FY16 FY17 FY18E FY19E FY20E
Capex (Rs m) Depreciation (Rs m)
Source: Company Data, PL Research
Ipca Laboratories
March 09, 2018 22
With major capex behind them in FY15-17, management guided for only
maintenance capex of Rs1bn per annum till FY20E due to large under-utilised
capacity. This will adequately meet the demand of additional production from the
improved business verticals. Lower capex will result in flat depreciation and result in
lower deferred tax and leverage ratio.
Exhibit 26: Tax & Tax Rate
29%
18%
25% 25%23%
22%
0%
5%
10%
15%
20%
25%
30%
0
200
400
600
800
1000
1200
1400
1600
FY15 FY16 FY17 FY18E FY19E FY20E
Tax (Rs m) Tax Rate (%) (RHS)
Source: Company Data, PL Research
The expected improvement in US generics and International tenders of anti-malarial
drugs will also decrease effective tax rate. We assumed net capex of Rs1.6-1.85bn,
average depreciations growth of 4.5% YoY and gradual reduction of tax provisions to
22% in FY20E from 25% in FY17. These have resulted in lower gross D/E ratio of 0.1x
in FY20E from 0.3x in FY17. Current gross debt is Rs7bn (US$100mn) and net debt is
guided to be Rs5.5bn in FY18E.
Exhibit 27: Debt profile
0.60
0.37
0.270.21
0.120.08
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0
2000
4000
6000
8000
10000
12000
14000
FY15 FY16 FY17 FY18E FY19E FY20E
Gross Debt (Rs m) Net Debt (Rs m) Gross Debt-Equity Ratio (RHS)
Source: Company Data, PL Research
Ipca Laboratories
March 09, 2018 23
Improved business to improve return ratios
Like other financial parameters, IPCA’s return ratios also peaked in FY14 with ROE,
ROCE and ROIC of 27%, 21% and 20%, respectively. The downfall of business and
earnings since FY15 also affected return ratios of the company. We believe that
earnings degradation has bottomed out and poised to turnaround on the back of
few positive events expected to occur in FY18E-20E. We expect return ratios to
improve as ROE, ROCE and ROIC to improve to 15%, 13% and 14% in FY20E from 8%,
7% and 6% in FY17.
Exhibit 28: ROE, ROCE & ROIC
0.0
5.0
10.0
15.0
20.0
25.0
30.0
FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
ROE (%) ROCE (%) ROIC (%)
Source: Company Data, PL Research
Other key management guidance
Revenue growth is guided to be 12-13% and 12% in Q4FY18E and FY19E,
respectively
EBITDA margin is guided to be 13-14% in Q4FY18E (due to high contribution of
WHO-tender supply with lower margin) and 18-18.5% in FY19E
R&D is guided to be 3% of revenues
Current tax rate of 24-25% to continue in the near term. The plant at Sikkim
continues to enjoy tax benefits, while the plant at Uttarakhand completed tax
benefits regime after 10 years since inception
Receivable days (DSO) to be maintained at the current level, while inventory
days to be reduced, going forward
Ipca Laboratories
March 09, 2018 24
Risks and Concerns
Delayed resolution from FDA
Inability to secure resolution post plant visit of USFDA in FY19E to have serious
impact on revenue recovery and remain key risk to our earnings assumptions.
New observations may affect international tender business
In case of new observations on expected FDA visits of the three plants may also
impact IPCA’s prospects to win large contract in anti-malarial business from the
Global fund. This would result in very slow recovery in international tender business.
New observations may also lead to additional overhead
If the expected new FDA visits raise serious observations, then there are possibilities
of additional overheads on remediation works and consultant fees.
Systemic risk of new NPPA regulations
In case of any new restrictions (price/products) by NPPA, it may pose a setback for
our assumptions of normalised year of sales for IPCA’s India formulation business.
Ipca Laboratories
March 09, 2018 25
Valuations
We expect 12% YoY earnings growth in FY18E despite a) GST-ridden India
formulation sales and b) withdrawal of FDA exception list for US exports, we believe
that declining earnings has bottomed out since Q1FY18. The catalyst of recovery to
be driven by a) resumption of supply of anti-malarial drugs to private funds from
Q1FY19E, b) USFDA resolutions of three plants, c) normalisation of India
formulations and d) de-risking of API exports with commissioning of Baroda plant.
Exhibit 29: Revenue, PAT & PAT Growth
8%
3%
6% 7%
10%
12%
0%
2%
4%
6%
8%
10%
12%
14%
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
FY15 FY16 FY17 FY18E FY19E FY20E
Revenue (Rs m) PAT (Rs m) PAT Margin (%) (RHS)
Source: Company Data, PL Research
With our conservative earnings estimates, IPCA currently trades at PE of 24x in FY19E
and 17x in FY20E, a comparatively cheaper valuation to the mid-cap peers. The
opportunity of value unlocking through gradual improvement in fundamentals will
drive growth in revenues, EBITDA and earnings in the medium term. Operating
leverage is also another catalyst to drive faster margin expansion and bring
favourable sensitivity in earnings. To reflect inherent risk of US resolution,
international tender and India formulations, we have discounted 36% CAGR of EPS
in FY17-20E by 40% and assigned PE of 21.8x on FY20E earnings to arrive at our TP
of Rs837. With 26% upside to our TP, we initiate our coverage with ‘BUY’. Inability
to trigger the key events to achieve projected revenue growth and earnings remains
the key risk to our recommendation, while large orders from the Global Fund or
faster FDA resolution will be a catalyst for an upgrade.
Ipca Laboratories
March 09, 2018 26
Exhibit 30: 1Yr Fwd PE Band Chart
10.0x
20.0x
30.0x
40.0x
50.0x
0
500
1,000
1,500
2,000
Mar
-10
Au
g-10
Jan
-11
Jun
-11
No
v-11
Ap
r-12
Sep
-12
Feb
-13
Jul-
13D
ec-
13M
ay-1
4O
ct-1
4M
ar-1
5A
ug-
15Ja
n-1
6Ju
n-1
6N
ov-
16A
pr-
17Se
p-1
7Fe
b-1
8
Source: Company Data, PL Research
Exhibit 31: Mean-Deviation points to undervaluation of IPCA v/s peers
0.0
20.0
40.0
60.0
80.0
100.0
Ap
r-13
Jul-
13Se
p-1
3N
ov-
13Ja
n-1
4A
pr-
14Ju
n-1
4A
ug-
14O
ct-1
4Ja
n-1
5M
ar-1
5M
ay-1
5Ju
l-15
Oct
-15
De
c-15
Feb
-16
Ap
r-16
Jun
-16
Sep
-16
No
v-16
Jan
-17
Mar
-17
Jun
-17
Au
g-17
Oct
-17
De
c-17
Mar
-18
P/E (x) Average (µ) 1*σ 2*σ
Source: Company Data, PL Research
PL v/s Consensus
As stated, we are conservative in our estimates of key financial parameters v/s the
consensus estimates, as we believe that improvement in IPCA would be gradual. The
major differences are our: a) estimates of lower tax rate in the medium term and b)
lower depreciations and higher operating leverage to expand EBITDA margin over a
period. With limited downside to the current valuation, we suggest to “BUY” the
stock at the current valuation.
Exhibit 32: PL v/s Consensus - Remain conservative vis-a-vis the street
Our estimates vs. consensus PL Estimates Consensus Estimates Variance (%) (PL vs Cons)
FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E
Revenues (INR m) 31,890 35,219 41,068 32,155 37,058 42,645 -1% -5% -4%
EBITDA (INR m) 4,082 5,793 7,515 4,496 6,360 7,956 -9% -9% -6%
Margin (%) 12.8% 16.5% 18.3% 14.0% 17.2% 18.7%
PAT (INR m) 2,151 3,484 4,851 2,303 3,649 4,847 -7% -5% 0%
EPS (INR) 17.0 27.6 38.4 18.3 28.9 38.4
Source: Company Data, PL Research
Ipca Laboratories
March 09, 2018 27
Income Statement (Rs m)
Y/e March 2017 2018E 2019E 2020E
Net Revenue 30,927 31,890 35,219 41,068
Raw Material Expenses 11,130 11,162 11,622 12,936
Gross Profit 19,796 20,729 23,597 28,131
Employee Cost 6,960 7,255 7,572 8,419
Other Expenses 9,037 9,392 10,231 12,197
EBITDA 3,800 4,082 5,793 7,515
Depr. & Amortization 1,730 1,762 1,879 1,970
Net Interest 241 230 173 133
Other Income 845 871 897 924
Profit before Tax 2,675 2,961 4,638 6,336
Total Tax 675 725 1,067 1,394
Profit after Tax 2,000 2,236 3,572 4,942
Ex-Od items / Min. Int. 83 85 88 90
Adj. PAT 1,918 2,151 3,484 4,851
Avg. Shares O/S (m) 126.2 126.2 126.2 126.2
EPS (Rs.) 15.2 17.0 27.6 38.4
Cash Flow Abstract (Rs m)
Y/e March 2017 2018E 2019E 2020E
C/F from Operations 2,764 2,249 3,470 3,443
C/F from Investing (1,432) (1,417) (1,561) (1,655)
C/F from Financing (1,591) (1,033) (1,444) (1,404)
Inc. / Dec. in Cash (259) (201) 466 383
Opening Cash 1,689 1,430 1,229 1,695
Closing Cash 1,430 1,229 1,695 2,078
FCFF 903 1,733 1,875 2,009
FCFE (612) 930 604 738
Key Financial Metrics
Y/e March 2017 2018E 2019E 2020E
Growth
Revenue (%) 9.4 3.1 10.4 16.6
EBITDA (%) 51.8 7.4 41.9 29.7
PAT (%) 105.9 12.1 62.0 39.3
EPS (%) 105.9 12.1 62.0 39.3
Profitability
EBITDA Margin (%) 12.3 12.8 16.5 18.3
PAT Margin (%) 6.2 6.7 9.9 11.8
RoCE (%) 6.8 7.3 10.7 13.4
RoE (%) 8.1 8.4 12.2 14.9
Balance Sheet
Net Debt : Equity 0.2 0.1 0.1 —
Net Wrkng Cap. (days) 198 201 221 242
Valuation
PER (x) 43.8 39.1 24.1 17.3
P / B (x) 3.4 3.1 2.8 2.4
EV / EBITDA (x) 23.6 21.6 14.9 11.3
EV / Sales (x) 2.9 2.8 2.5 2.1
Earnings Quality
Eff. Tax Rate 25.2 24.5 23.0 22.0
Other Inc / PBT 31.6 29.4 19.3 14.6
Eff. Depr. Rate (%) 7.6 7.2 7.2 7.1
FCFE / PAT (31.9) 43.2 17.3 15.2
Source: Company Data, PL Research.
Balance Sheet Abstract (Rs m)
Y/e March 2017 2018E 2019E 2020E
Shareholder's Funds 24,553 26,703 30,187 35,039
Total Debt 7,158 6,355 5,084 3,813
Other Liabilities 1,966 1,880 1,752 1,600
Total Liabilities 33,676 34,938 37,023 40,451
Net Fixed Assets 20,307 20,051 19,851 19,653
Goodwill 472 472 472 472
Investments 222 222 222 222
Net Current Assets 11,421 12,871 15,075 18,421
Cash & Equivalents 1,494 2,365 2,830 3,214
Other Current Assets 15,846 16,305 18,028 21,670
Current Liabilities 5,919 5,799 5,784 6,463
Other Assets 1,254 1,322 1,402 1,683
Total Assets 33,676 34,938 37,023 40,451
Quarterly Financials (Rs m)
Y/e March Q4FY17 Q1FY18 Q2FY18 Q3FY18
Net Revenue 6,658 7,130 8,643 8,592
EBITDA 677 215 1,490 1,612
% of revenue 10.2 3.0 17.2 18.8
Depr. & Amortization 428 433 441 438
Net Interest 44 56 64 56
Other Income 52 62 110 110
Profit before Tax 257 (212) 1,096 1,228
Total Tax (187) (10) 131 172
Profit after Tax 444 (202) 965 1,056
Adj. PAT 444 (202) 965 1,056
Key Operating Metrics (Rs m)
Y/e March 2017 2018E 2019E 2020E
Domestic Formulations 13,325 14,025 16,005 18,067
Export Formulations 9,959 10,051 10,902 13,845
APIs 7,103 7,355 7,875 8,707
Source: Company Data, PL Research.
Ipca Laboratories
March 09, 2018 28
Prabhudas Lilladher Pvt. Ltd.
3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage PL’s Recommendation Nomenclature
43.8% 44.5%
11.7%
0.0%0%
10%
20%
30%
40%
50%
BUY Accumulate Reduce Sell
% o
f To
tal
Co
vera
ge
BUY : Over 15% Outperformance to Sensex over 12-months
Accumulate : Outperformance to Sensex over 12-months
Reduce : Underperformance to Sensex over 12-months
Sell : Over 15% underperformance to Sensex over 12-months
Trading Buy : Over 10% absolute upside in 1-month
Trading Sell : Over 10% absolute decline in 1-month
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly
DISCLAIMER/DISCLOSURES
ANALYST CERTIFICATION
We/I, Mr. Surajit Pal (PGDBA, CFA, M.Com), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
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ANALYST CERTIFICATION
The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report
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