‘Buy’ IPCA Laboratories stock, target price up to Rs 975; but watch out for this risk – Elara Capital

New Delhi | Published: March 12, 2019 2:41:27 AM

IPCA (IPCA IN) reported strong operating performance with an Ebitda (ex-forex gain) of Rs 2.1bn, up 34% year-on-year (y-o-y), well ahead of our estimates of Rs 1.7 bn, aided by higher revenue and lower staff cost.

exports, ratlam, stock marketsExport API was aided by Sartans across the EU market along with other products; we expect momentum to continue in FY20.

By Elara Capital

IPCA (IPCA IN) reported strong operating performance with an Ebitda (ex-forex gain) of Rs 2.1bn, up 34% year-on-year (y-o-y), well ahead of our estimates of Rs 1.7 bn, aided by higher revenue and lower staff cost.
Revenue grew by 10.3% y-o-y at Rs 9.5 bn vs Rs 9.3 bn. Domestic formulations grew at 10% y-o-y. Exports formulations grew by 2.5% y-o-y, in line with our estimates, aided by branded sales, up 41% y-o-y. API sales was up 20.1% y-o-y to `2.3 bn, aided by higher exports, up 40% y-o-y. GM continues to stay healthy, flat q-o-q and up 260bp y-o-y at 68.4%.

There was forex gain of Rs 284 mn booked in other expenses. Adjusted for this, other expenses have gone up 16% y-o-y; however, staff cost declined 3% y-o-y. The tax rate came in lower at 18.6% in Q3. As a result, PAT of `1.6 bn was ahead of our estimates of `850 m. Other expenses included one-off penalties related to supply failure of Propanol (`70 m) in the US and remediation cost of `140 m.

Further, staff cost was lower, given lower India sales as a result of which marketing incentives were low. Delay in shipments led to a decline in institutional business; however, management is confident of meeting revenue guidance of Rs 1.8 bn by FY19-end. Ipca guided for 14-5% growth in FY20 for domestic formulations business. Export API was aided by Sartans across the EU market along with other products; we expect momentum to continue in FY20.

Data verification for the Ratlam facility is likely to get over by March 2019-end; however, remediation work has been completed and await FDA re-inspection. Resumption of broad-based revenue growth except the US after flat FY14-18 (vs 13% over FY18-21E) should result in higher operating leverage.

We raise our EPS by 18% for FY19E and 8% each for FY20E and FY21E. We reiterate ‘Buy’ with a new TP of Rs 975 from Rs 920 on 18x (from 20x) FY21E P/E. Delay in FDA resolution is key risk.

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