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Ipca Labs: It's domestic this time - Views on News from Equitymaster

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Ipca Labs: It's domestic this time
Feb 8, 2010

Performance summary
  • Revenues grow by 26% YoY in 3QFY10 led by the robust performance of its domestic formulations business and APIs.
  • EBDITA margins remain stable at 22.8% during the quarter.
  • PAT grows by a robust 151% YoY during the quarter due to the strong performance at the operating level, reduction in interest costs and lower forex losses.


Standalone snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 3,133 3,957 26.3% 9,558 11,849 24.0%
Expenditure 2,421 3,054 26.1% 7,418 9,206 24.1%
Operating profit (EBDITA) 712 903 26.8% 2,140 2,643 23.5%
EBDITA margin (%) 22.7% 22.8%   22.4% 22.3%  
Other income 3 9 184.4% 12 56 366.4%
Interest (net) 115 53 -53.9% 225 200 -11.3%
Depreciation 104 119 15.3% 287 346 20.8%
Profit before tax 497 740 48.8% 1,640 2,152 31.2%
Forex loss/(gain) 192 17 -91.4% 603 (40)  
Tax 73 141 92.9% 204 473 132.4%
Profit after tax/(loss) 232 583 151.3% 833 1,719 106.3%
Net profit margin (%) 7.4% 14.7%   8.7% 14.5%  
No. of shares (m)       25.2 25.0  
Diluted earnings per share (Rs)*         71.9  
Price to earnings ratio (x)         16.1  
* on trailing 12-months basis

What has driven performance in 3QFY10?
  • Ipca’s topline during the quarter grew by 26% YoY largely led by the robust performance of its domestic formulations business and APIs. While the domestic formulations business registered an impressive growth of 38% YoY, export formulations grew by 11% YoY. As a result, the overall formulations business recorded a healthy growth of 24% YoY. APIs also did very well during the quarter to grow by 33% YoY. While domestic APIs grew by 32% YoY, revenues from export APIs grew by 34% YoY.

  • Ipca’s operating margins remained stable at 22.8% during the quarter. While raw material costs (as percentage of sales) increased during the quarter, this was offset by the decline in other expenditure (as percentage of sales). For the nine month period too, operating margins remained stable at 22.3%.

  • Ipca’s bottomline clocked an impressive 151% YoY growth during the quarter. This was led by the 27% YoY growth in operating profits, reduction in interest costs and lower forex losses. This growth came about despite tax expenses nearly doubling. For the nine month period, net profits grew by 106% YoY driven by higher other income, lower interest costs and forex gain of Rs 40 m during 9mFY10 as against a loss of Rs 603 m in 9mFY09.

What to expect?
At the current price of Rs 1,157, the stock is trading at a multiple of 17.9 times our estimated FY11 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. While the company is foraying into the US market at a time when there is already enough competition, we still believe that given its negligible base there is enough room for the company to grow revenues from this business. Launching new products on a consistent basis in all the markets that it is present in will be the key to augment revenues and profits. That said, forex pressures and pricing pressure in the UK market are the major challenges that the company could face in the future. Overall, we believe that current valuations do not leave much on the table for investors.

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