‘Buy’ Ipca Laboratories with a target price of R790 per share, valuing the stock at 17x FY17e EPS noting regulatory overhang. IPCA has corrected 24% since voluntary stoppage of US sales and is currently trading at 17x FY16e and 14x FY17e EPS, at discount to its 5-year average trading multiple as well as the sector (35%). We believe this is unjustified, noting robust branded formulations business, improving RoCE, strong earnings recovery and low leverage.
Ipca’s Q3 PAT was R4150 crore, 59% below our estimate on revenue disappointment and resultant adverse operating leverage, hurting ebitda margin. Ebitda shrank 44% y-o-y to R120 crore, 28% below our estimate. Forex losses and higher tax rates accentuated the earnings miss.
Third quarter sales declined 10% y-o-y to R740 crore, below our estimate. Off-take in institutional business declined 40% and currency crisis in the CIS led to 26% decline in branded exports. India (38% of sales) business grew 13% y-o-y (in line) while generics exports (except US) registered robust growth. Following flat sales in FY15e, we expect Ipca to register 17% CAGR over FY15-17, led by resumption in US sales for exempted products from March 2015, WHO clearance helping streamline capacity constraints affecting institutional sales from Q1FY16, and India formulations outgrowing industry.
By Motilal Oswal