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Ipca: Anti malarial hits domestic growth - Views on News from Equitymaster
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Ipca: Anti malarial hits domestic growth
Jan 31, 2013

Ipca has announced its 3QFY13 results. The company has reported 15% YoY growth in sales and 37.5% growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 15% YoY during the quarter led by growth in both its Formulations and API businesses.
  • Operating margins decline by 1.2% largely due to increase in overall expenses.
  • Bottomline increases by 37.5% YoY during 3QFY13 due to lower forex losses in 3QFY13 as compared to the corresponding quarter last year.

Financial performance: A snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 6,018 6,924 15.1% 17,461 20,801 19.1%
Expenditure 4,643 5,426 16.9% 13,669 16,277 19.1%
Operating profit (EBDITA) 1,375 1,498 9.0% 3,792 4,524 19.3%
EBDITA margin (%) 22.8% 21.6% 1.2% 21.7% 21.7%
Other income 171 126 -26.3% 318 426 34.0%
Interest (net) 102 74 -27.1% 282 258 -8.7%
Depreciation 181 216 19.1% 511 624 22.1%
Profit before tax 1,263 1,334 5.7% 3,317 4,068 22.7%
Tax 224 269 20.1% 702 799 13.8%
Forex (gain)/loss 399 185 -53.6% 579 711 22.6%
Profit after tax/(loss) 640 880 37.5% 2,036 2,559 25.7%
Net profit margin (%) 10.6% 12.7%   11.7% 12.3%  
No. of shares (m)         126.2  
Diluted earnings per share (Rs)         18.1  
Price to earnings ratio (x)*         26.5  
*based on trailing 12 months earnings

What has driven performance in 3QFY13?
  • Topline grows by 15% YoY during the quarter led by growth in both its Formulations and API businesses.

    Business mix
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Formulations 4,774 5,302 11.1% 13,626 15,807 16.0%
    (% of revenues) 79.3% 76.6%   78.0% 76.0%  
    Domestic 1,876 2,127 13.4% 6,058 6,997 15.5%
    Export 2,898 3,175 9.5% 7,569 8,811 16.4%
    API 1,244 1,622 30.4% 3,835 4,994 30.2%
    (% of  revenues) 20.7% 23.4%   22.0% 24.0%  
    Domestic 332 373 12.2% 1,096 1,071 -2.3%
    Export 911 1,249 37.1% 2,740 3,923 43.2%
    Total 6,018 6,924   17,461 20,801  

  • Domestic formulations witnessed 13.4% YoY growth during the quarter. As per the management, the anti malarial segment, which accounts for 19% of domestic sales, witnessed tepid growth of 8% YoY for 3QFY13. This was a result of slow demand for drugs, due to lower incidence of malaria cases. As per management, FY13 was the second consecutive year when the company had witnessed weak growth in this segment. Further, some part of Nutraceuticals segment was impacted by Rs 60 - Rs 70 m for the 9 months period due to new regulation for nutraceuticals manufacturing. This segment contributes 2% to domestic sales. However, the other segment viz., Pain, Dermatology, CNS, and Urology have registered growth above the overall market growth. CNS grew in line with the market growth. Currently there are 3,000 medical representatives (MRs) in the domestic segment. The company continues to focus on 6-7 launches per year in the domestic market and is widely promoting the same.

  • Export formulations witnessed growth of 10% YoY for 3QFY13. During the quarter, the generic segment witnessed marginal increase of 1% YoY. This was due to the 44% YoY decline in revenues from the UK to Rs 320 m. The growth was impacted on the back of temporary halt in the production of drugs for 1.5 months. The US segment witnessed modest growth of 14% YoY for 3QFY13. The company's current USFDA manufacturing facility is running at 100% capacity, which leaves no room for further increasing production. The company will be able to increase the production only after its Indore SEZ gets USFDA clearance. Ipca expects USFDA to visit the plant in April 2013, and thus US business will ramp up only after the SEZ facility gets clearance. The company has 17 pending USFDA approvals and will be filing for another 6 by the end of FY13. It expects revenues of around Rs 700-Rs800 m from the Indore SEZ. In the Institutional business, the company has started getting orders for its second product, where Ipca is the only generic company to get the approval. Other than Ipca, Sanofi sells this product. Ipca expects revenues of approx. Rs 350 m from this product. The company expects this segment to generate revenues of Rs 3.8 to 3.9 bn for FY13 and Rs 4.5-4.6 bn for FY14. The branded formulations witnessed growth of 33%YoY to Rs 876 m for 3QFY13. The other geographies viz., Russia, South Africa and RoW markets witnessed good growth.

  • The API segment witnessed robust growth of 30% YoY for 3QFY13. This growth was fueled by exports API, which grew by 37% YoY for the quarter. However, this was due to one-off sales during the quarter. In the upcoming period, the company expects this segment to grow in the range of 20%-25%.

  • Operating margins declined by1.2% YoY for 3QFY13. This was due to increase in the costs by Rs 200 m related to USFDA re-inspection of the SEZ plant and some additional product registration costs. Further, the impact is also due to fixed expenditure at its SEZ facility, which is awaiting USFDA clearance. The company is looking to improve its EBITDA margins by ~1% per annum in the long run, barring the currency fluctuation impact.

  • Bottomline increased by 37.5% YoY during 3QFY13 due to lower forex loss in 3QFY13. During 3QFY13, the company incurred forex loss of Rs 185 m vs. Rs 399 m in 3QFY12. For 9mFY13, Ipca incurred realized loss of Rs 290 m and unrealized loss of Rs 420 m. Till date, the company's forex loss stands at Rs 710 m vs., Rs 511 during 9mFY12. The net margins, excluding the overall forex impact, for the quarter and nine months was 15.4% (down by 1.9% YoY) and 15.7% (down by 0.7% YoY) respectively.

What to expect?
At the current price of Rs 481, the stock is trading at a price to earnings multiple of 9.8 times our estimated FY15 earnings. Growth is expected to be robust going forward as the company considerably ramps up its registration of products which will ultimately lead to new product launches. Further, with the SEZ plant getting operational, Ipca will benefit on the bottom line too. The company's low cost manufacturing has always helped it get tenders and thus it will be able to generate business on that front as well. However, the anti malarial segment is a drag on the company's domestic business. Thus, we recommend investors to Hold on to the stock.

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