Maintain ‘buy’ on IPCA Laboratories and retain target price of R900 for March 2016, implying 20x FY17e EPS. IPCA is likely to register earnings growth of 34% from FY17e-20e led by launches in the US, as the import alerts are resolved. Hence, a 20x multiple on suppressed earnings of FY17e appears reasonable.
IPCA does not expect a consent decree from the FDA. The management is waiting to receive the warning letters for all three facilities to get a sense of what needs to be done to resolve the import alert. IPCA expects to invite the FDA for inspection of all three facilities before December 2015. As per the company, barring some specific data integrity issues at the Ratlam API unit, all other observations on lab practices are common to all the three facilities and hence the resolution measures are also similar.
The company is in the process of completely automating all its production units. Automation would reduce scope for human errors which seems to be the root cause of all the US FDA observations. Athal (Silvassa, India) accounts for 100% of WHO sales and 90% of Europe sales. However, the facility is due for inspection in 2015 from WHO and UKMHRA. WHO has issued 9 observations post inspection of the Ratlam API unit. The company expects to address these issues in 3-4 weeks and receive the GMP certificate in two months post that.