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Ipca: Impacted by regulatory glitches - Views on News from Equitymaster
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Ipca: Impacted by regulatory glitches
Feb 12, 2015

Ipca has announced its 3QFY15 results. The company has reported a decline of 10.7% YoY and 70% YoY in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales decline by 10.7% YoY during the quarter due fall in export revenues.
  • Operating margins fall sharply by 9.7% leading to the 44% YoY drop in operating profits.
  • Consequently, net profits take a sharp hit and decline by 70% YoY.

Standalone financial performance snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 8,220 7,341 -10.7% 24,562 24,372 -0.8%
other operating income 110 65 -40.5% 290 200 -31.0%
Expenditure 6,156 6,195 0.6% 18,623 19,704 5.8%
Operating profit (EBDITA) 2,173 1,211 -44.3% 6,229 4,868 -21.8%
EBDITA margin (%) 26.1% 16.4%   25.1% 19.8%  
Other income 54 64 18.8% 152 214 41.1%
Interest (net) 54 59 8.3% 183 174 -5.2%
Depreciation 256 420 64.2% 749 1,195 59.5%
Profit before tax 1,917 797 -58.4% 5,449 3,714 -31.8%
Forex (gain)/loss 24 112 360.7% 903 183  
Tax 502 270 -46.2% 1,143 1,048 -8.2%
Profit after tax/(loss) 1,391 415 -70.2% 3,403 2,483 -27.0%
Net profit margin (%) 16.9% 5.7%   13.9% 10.2%  
No. of shares (m)         126.2  
Diluted earnings per share (Rs)          30.5  
Price to earnings ratio (x)*          21.6  
*based on trailing 12 months earnings

What has driven performance in 3QFY15?
  • The net sales were down by 10.7% YoY, largely impacted by poor exports and decline in API revenues.

    Business Mix
    (Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
                 
    Formulations 6,350 5,838 -8.1% 18,615 18,988 2.0%
    (% of revenues) 77% 80%   76% 78%  
    Domestic 2,463 2,787 13.1% 7,729 8,998 16.4%
    Export 3,886 3,051 -21.5% 10,887 9,990 -8.2%
    API 1,870 1,504 -19.6% 5,947 5,384 -9.5%
    (% of  revenues) 23% 20%   24% 22%  
    Domestic 419 370 -11.6% 1,280 1,457 13.8%
    Export 1,451 1,134 -21.9% 4,667 3,927 -15.8%
    Total 8,220 7,341 -10.7% 24,562 24,372 -0.8%

  • Company reported good traction in domestic sales, however, poor export performance marred overall growth. Lower API sales also impacted growth. During the quarter, the management has shown some confidence in regaining the market share of some products and in some geographies. This will improve the margins too going forward.

  • Decline in sales and rise in fixed overhead costs hit the margins. The company had acquired two manufacturing facilities and thus the increase in these overhead costs negatively impacted operating margins.

  • While operating profits were down by 44% YoY, net profits fell steeply by 70% YoY on account of higher depreciation charges and forex losses.

    Ratlam receives import alert but with riders

    The Ratlam facility received import alert by the US regulators. However, the USFDA has exempted 4 products from this alert. This means Ipca will be able to manufacture and sell these four drugs in the US market.

    It is imperative to note the company generates 45% of sales from the two products (out of four exempted from alert). Hence, from 1QFY16 onwards, the company will be able to recapture its lost sales in these products. We believe the company might take some quarters to regain the market share since some players entered the market for these drugs.

    It is still not clear when the company will receive clearance on this facility and hence we remain cautious on that front. Further, since the Indore formulation facility has already received couple of 483s, any negative development with respect to the Indore SEZ could impact the company's stock price. Having said that, the Indore facility was still not actively manufacturing drugs for the US market. Hence the revenue stream is not bound to get impacted much by any negative move from the USFDA.

What to expect?
At the current price of Rs 656, the stock is trading at a price to earnings multiple of 12.4 times our revised estimated FY17 earnings. We have revised our estimates on the back of the import alert and impact on the other regions too. While Ipca is among the few fundamentally strong companies with good corporate governance, the recent events have not been in the company's favour and have hit the performance and the stock price. As seen in last couple of quarters, the growth and margins have already got impacted.

Thus we maintain a cautious stance and recommend investors not to Buy the stock. Those who already have Ipca in their portfolio, however, can Hold on to the same.

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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