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Ipca Labs: Strong growth in profits - Views on News from Equitymaster

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Ipca Labs: Strong growth in profits
Jan 30, 2014

Ipca Labs has announced its 3QFY14 results. The company has reported 19% YoY and 58% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 19% YoY in 3QFY14 led by the growth in both its domestic and exports businesses.
  • EBDITA margins expand by 3.5% during the quarter largely driven by lower raw material costs (as percentage of sales).
  • Led by a strong operating performance and lower forex losses, net profits grow by a robust 58% YoY.

Standalone snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 7,010 8,330 18.8% 21,067 24,852 18.0%
Expenditure 5,426 6,156 13.4% 16,277 18,623 14.4%
Operating profit (EBDITA) 1,584 2,173 37.2% 4,790 6,229 30.0%
EBDITA margin (%) 22.6% 26.1%   22.7% 25.1%  
Other income 40 54 36.5% 161 152 -5.6%
Interest (net) 74 54 -26.5% 258 183 -29.0%
Depreciation 216 256 18.5% 624 749 20.1%
Profit before tax 1,334 1,917 43.8% 4,069 5,449 33.9%
Forex loss/(gain) 186 24 -87.0% 711 903 27.1%
Tax 269 502 86.6% 799 1,143 43.0%
Profit after tax/(loss) 879 1,391 58.3% 2,560 3,403 33.0%
Net profit margin (%) 12.5% 16.7%   12.1% 13.7%  
No. of shares (m)       126.2 126.2  
Diluted earnings per share (Rs)*         33.0  
Price to earnings ratio (x)         25.1  
* on trailing 12-months basis

What has driven performance in 3QFY14?
  • Ipca's topline during the quarter grew by 19% YoY largely led by both the domestic and export businesses. While the domestic formulations business registered a growth of 16% YoY, export formulations grew by a robust 20% YoY. As a result, the overall formulations business recorded a healthy growth of 18% YoY. As far as the semi-regulated markets are concerned, revenues were up 14% YoY. The geographies of Latin America, Middle East and South East Asia did well. However, performance of the CIS markets was slightly impacted as there was a delay in shipments to Ukraine. The generics business grew by a robust 35% YoY largely led by the 66% YoY growth in the UK. The US and South Africa grew by 9% YoY and 5% YoY respectively. The institutional generics business grew by 20% YoY largely on account of the 14% YoY increase in volumes. As far as the domestic formulations business is concerned, therapeutic areas such as pain management, dermatology, urology and central nervous system (CNS) did well. However, anti-malarials witnessed a decline. Further, some of the older products in the company's portfolio continued to face pricing pressure on account of the new drug pricing policy. APIs also put up a strong show during the quarter as sales from this segment grew by 18% YoY. Domestic APIs sales were up by 12% YoY, whereas revenues from export APIs grew by 16% YoY.

  • Ipca's operating margins improved by 3.5% during the quarter on account of the fall in raw material costs (as percentage of sales). This was on account of a better product mix and also because of rupee depreciation. Some of the gains were also attributed to higher other operating income. The company had signed an agreement with a partner in the US for 21 products and with respect to this received milestone payment of Rs 1 bn which was part of other operating income and also contributed to the overall increase in margins.

  • Led by a strong operating performance and lower forex losses, net profits grew by a robust 58% YoY.
What to expect?
At the current price of Rs 828, the stock is trading at a price to earnings multiple of 12.8 times our estimated FY16 earnings. Ipca's growth drivers over the next three years will be the domestic market, ramp up of its US business and increasing sales from the semi-regulated markets. The US business is expected to ramp up as the company launches the rest of the products for which it has received approvals in that market. Given that the company's presence in the US is currently small and it does not have a marketing front end, its strategy includes partnering with many players to augment growth of this business. The institutional generics business is also expected to ramp up going forward on the back of launches of injectables. Based on the current valuations, we recommend that investors Hold on to the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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