IPCA Labs - Motilal Oswal

6 June 2012UpdateIPCA LabsCMP: INR340 TP: INR500 BuyGuides for healthy growth across segments; EarlyUSFDA approval of Indore SEZ key to ramp-up in US;BuyWe met the management of IPCA Labs (IPCA IN, Mkt Cap USD0.8b, CMP INR340,Buy). Key takeaways from the same:• Following a strong FY12, IPCA is set to do an encore in FY13 led by healthygrowth across business segments and benefit of favorable currency.• Though the management has not specifically guided for topline growth forFY13, it has indicated healthy double digit revenue growth for all the majorbusiness segments. API will continue to report single digit growth rate inmedium term due to increased internal consumption. Further, the companyhas guided for 50bp improvement in margins for FY13 on the back of 200bpimprovement in FY12.• We expect a significant ramp-up in IPCA’s international formulationsrevenues led by 35% CAGR for the US business and 24% CAGR in brandedformulations business. Also, the domestic business is expected to reporthealthy growth in over next couple of years• Expect 27% EPS CAGR We expect IPCA to clock FY12-14 PAT and EPS CAGR of27% on the back of 16% revenue CAGR coupled with margin expansion.• The stock is currently valued at 11.2x FY13E EPS and 9.5x FY14E EPS, and is at25-50% discount to its historic and peer valuation.• Reiterate Buy with target price of INR500 (14x FY14E EPS).India formulations - Likely to report robust growth in coming years ledby CVS, Pain management and cough & cold segments• After facing various headwinds in domestic formulation business in FY12,IPCA seems to be back on healthy growth track and is expected to reporthigher double digit-growth in this business over next couple of years.• IPCA’s India formulations business had reported muted growth of 8.2% inFY12 due to: 1) Lower incidence of malaria in the country (IPCA is a leadingplayer in the anti-malarial market), 2) Divisional restructuring of the businesswith the company forming 12 different focused divisions to ensure focusedproduct promotion and doctor coverage, and 3) Significant attrition in the1

IPCA Labssales force.• However, the business has seen revival in growth in 4QFY12 with businessgrowing 14.7% led by key therapeutic segments of CVS and Painmanagement. Management has indicated that, the domestic formulationbusiness is likely to report 18-20% YoY growth in FY13 partially due to lowbase. Going forward, the management does not expect any significantaddition to existing field force of ~3,600MRs as the focus will be onproductivity improvement.• We are estimating slightly conservative growth of 16% in FY13 to take intoaccount rising competition in acute therapeutic segments and uncertaintyrelated to anti-malaria segment. We note that the company has recorded22.5% CAGR in this business for the FY05-11 period and we view the lowergrowth in FY12 as a temporary blip.Indore SEZ – Early US FDA approval will lead to strong scale-up• IPCA has set up its Indore SEZ at a cost of INR2b and has been awaiting USFDA inspection/approval for the past 2 years. This SEZ is an importantdeterminant of IPCA’s revenue growth in the US market as this SEZ is likely toaddress to key issues for IPCA, viz., new product approvals and availability ofincreased capacities (IPCA’s US business is currently facing capacityconstraints).• The US FDA has recently inspected this SEZ. While the final US FDA approvalis still awaited, IPCA management does not expect any major hurdles ingetting the approval.• US FDA approval for this facility will be a positive trigger for IPCA as (1) it willbe able to launch new products in the US, and (2) undertake a site transferfor already commercialized products to the new facility to take advantage ofthe expanded capacity, thus driving strong growth and profitability of the USbusiness. The company has filed 25 ANDAs with USFDA and has receivedapproval for 12. It plans to file 8-10 ANDAs every year going forward.• We estimate this SEZ to contribute ~USD5m to IPCA’s topline for FY13.6 June 2012 2

IPCA LabsManagement has indicated that at peak capacity utilization (likely in the next3 years), the SEZ can generate sales of USD80-100m.Institutional supplies: Anti-malarial formulation business attains criticalmass; expect 20% growth in FY13• In FY10, IPCA received WHO pre-qualification to supply Artemether-Lumefantrine (an anti-malaria formulation) to the African continent. This is aUSD250m market with only 3 other players. Further, the company recentlyreceived WHO pre-qualification for Artesunate-Amodiaquine and is the onlycompany apart from innovator, to get the approval. This is a USD50m marketfor IPCA. These are lucrative product opportunities for the company withsignificantly high EBITDA margins at ~30%.• We note that IPCA is the only fully integrated player in this product, andhence enjoys significant advantage over other players in terms of ramping upthe business. Currently Novartis has the largest share in the institutionaltender business for the product.• IPCA's revenue from this product has increased from INR1.2b in FY11 toINR3b in FY12. The management has guided for 20% revenue growth for thisbusiness in FY13. The company has confirmed order book for next 7-8months.• Our revenue estimates at INR3.6b for FY13 and INR4b for FY14 effectivelyfactor in this expected ramp-up.International formulations business (ex-institutional) to record 22%CAGR for FY12-14• We expect a significant ramp-up in IPCA’s international formulationsrevenues led by 35% CAGR for the US business and 23.7% CAGR in brandedformulations business led by strong growth in all three main geographies, viz,CIS, Asia & Africa.• Pure generic supplies (regulated market formulations) are expected torecord 22% CAGR for FY12-14 led by two main factors in US: 1) Newapprovals and launches, and 2) Availability of expanded capacities post theUS FDA approval for the SEZ.• European generic revenues are expected to record a more modest 13%CAGR for FY12-14 due to pricing pressure. We note that the revenue fromEurope were impacted due to implementation of new packaging system.However, the management indicated that the productivity is coming back ontrack.• Overall the international formulation revenues are expected to record 20.4%CAGR for FY12-14.6 June 2012 3

IPCA LabsAPI business – Vadodara facility to expand capacities; expect single digitgrowth over next 2-3 years• IPCA has received environmental clearance to build API plant at Vadodara. Thecompany is expected to start work very soon. In FY13, capex on this facility istargeted at ~INR1.5b.• The facility is expected to commission only in FY14 after which the company canstart supplying APIs in domestic market and in semi-regulated markets.However, it will take another 2-3 years to start supplying APIs to regulatedmarkets as the facility will have to get approvals from regulatory agencies.• We expect the business to report single digit growth till such time.Valuation & outlook• IPCA is one of the better managed pharma companies in India with strongpositioning in domestic formulation business and growing presence abroad. Thecompany is likely to sustain its high profitability backed by backward integrationcapabilities in API manufacturing.• The performance of the company will be driven by all the major businesssegments like domestic formulations, international formulations andinstitutional supplies.• Expect 27% earning CAGR: We expect IPCA to clock FY12-14 PAT and EPS CAGRof 27% on the back of 16% revenue CAGR coupled with margin expansion.• EBITDA is expected to record 18.6% CAGR for FY12-14. EPS growth is higher thanEBITDA growth due to absence of large forex losses reported in FY12.• Further, despite INR5b capex over FY13-14 (to sustain growth), the company islikely to record healthy return ratios and low gearing.• The stock is currently valued at 11.2x FY13E EPS and 9.5x FY14E EPS. The stocktrades at 25-50% discount to its historic and peer valuation.• Reiterate Buy with target price of INR500 (14x FY14E EPS).6 June 2012 4

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