IPCA Lab rating: Retain ‘hold’ with revised target price of Rs 1,950

August 13, 2020 4:50 AM

According to management, raw material cost pressures have waned and some part of cost savings are here to stay, which will drive margin.

Management estimates 18-19% revenue growth and higher Ebitda margin improvement in FY21 than earlier guidance of 150bps.Management estimates 18-19% revenue growth and higher Ebitda margin improvement in FY21 than earlier guidance of 150bps.

By Edelweiss Securities

Ipca Laboratories (IPCA) reported strong Q1FY21 numbers, surpassing estimates. Top line grew 42% y-o-y and Ebitda margin expanded 20 percentage points to 38% led by, Rs 2.6bn sales from HCQs; Rs 260mn spillover sales; and lower marketing & promotional spends, partly offset by muted domestic formulations growth of 4% y-o-y.

According to management, raw material cost pressures have waned and some part of cost savings are here to stay, which will drive margin. Management estimates 18-19% revenue growth and higher Ebitda margin improvement in FY21 than earlier guidance of 150bps. The strong Q1FY21 numbers and lower cost guidance prompt us to revise up FY21/22E EPS 36%/18%. However, we believe, the stock is fairly valued at 22x FY22E EPS, capturing the upside. US normalisation still remains uncertain as the USFDA’s reinspection has not been confirmed as yet. Maintain ‘hold’ with revised TP of Rs 1,950 (earlier Rs 1,650).

Domestic business grew mere 4% y-o-y, excluding incremental sales from HCQs. India business continues to face pressure due to lower patient footfalls and limited malaria cases despite peak season. Moreover, HCQs sales have significantly dipped now as the USFDA has removed it from Emergency Use Authorisation and new treatments are emerging. That said, the company expects API business to do well and is planning to invest Rs 3bn in Dewas API units with implementation period of 15 months, thus adding 20% to current capacities. Further, the tight leash on cost, lower raw material cost and de-bottlenecking activities are likely to keep the margins buoyant.

Global tenders, UK resolution and injectables in Africa are underway. While management expects the branded business to grow in high double digits and the API business to do well, domestic formulations and generics exports growth remains key monitorable. The company continues to expect a reinspection at the Piparia and Indore SEZ, albeit with limited clarity on timelines.

The timelines for USFDA reinspection remain uncertain, while other levers are fully priced in. The stock is trading at 22x FY22E EPS. The strong Q1FY21 numbers and lower cost guidance prompt us to revise up FY21/22E EPS 36%/18%.

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