IPCA’s Q2 EBITDA grew 16% y-o-y (6x q-o-q), which was 33% ahead of our estimate. This was led by (1) strong recovery in India business, (2) 335 bps y-o-y improvement in gross margin with better product mix (lower anti-malaria business in India) and (3) cost rationalisation which led to 255 bps y-o-y improvement in EBITDA margin to 17.2%. We believe operating leverage has begun as we expect (1) mid-teens growth in India business (up 13% y-o-y adj. for GST in Q2) and (2) resumption of institutional anti-malaria tender business from CY18. USFDA issues once resolved (remediation for Ratlam API unit expected by end-CY17) will further drive operating leverage.
Overall revenue marginally declined 1% y-o-y, but grew 21% q-o-q at Rs 8.6 billion – in line with our estimates. Domestic formulations (50% of sales) grew 3% y-o-y (up 13% y-o-y accounting for GST adjustments) and 44% q-o-q led by channel restocking despite lower anti-malarial sales. Export formulations (27% of sales) revenue declined 11% y-o-y (-1% q-o-q) primarily on 23% y-o-y decline in generics business with no shipments to US (USFDA withdrew drug exemptions in Q1FY18), absence of global fund (anti-malaria) institutional business and UK currency issue (5% y-o-y GBP/rupee depreciation). Institutional anti-malarial business declined 45% y-o-y to Rs 220 million due to deferment of some sales to Q3. Branded generics revenue grew 23% y-o-y.
