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Ipca: Better product mix drives margins
Jun 18, 2014

Ipca has announced its 4QFY14 results. The company has reported 12.3% YoY and 81.7% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline (including other operating income) grows by 11.6% YoY during the quarter led by growth in the formulations segment. API segment witnesses muted growth.
  • Operating margins improve by 2.8% largely due to better product mix. Better gross margins boost the company’s overall operating margins.
  • Bottomline increases by 81.7% YoY during 4QFY14 on the back of decline in taxes, sharp increase in other income and higher forex gains.

Financial performance: A snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 6,586 7,398 12.3% 27,537 31,994 16.2%
other operating income 131 98 -25.0% 595 823 38.5%
Expenditure 5,274 5,673 7.6% 21,900 24,712 12.8%
Operating profit (EBDITA) 1,443 1,823 26.4% 6,232 8,106 30.1%
EBDITA margin (%) 21.5% 24.3%   22.2% 24.7%  
Other income 26 62 144.3% 143 223 55.6%
Interest (net) 55 63 14.2% 334 269 -19.4%
Depreciation 236 260 10.1% 867 1,031 19.0%
Profit before tax 1,177 1,563 32.8% 5,174 7,028 35.8%
Forex (gain)/loss (78) (182)   631 723 14.5%
Tax 501 375 -25.2% 1,299 1,524 17.3%
Profit after tax/(loss) 754 1,370 81.7% 3,243 4,781 47.4%
Net profit margin (%) 11.5% 18.5%   11.8% 14.9%  
No. of shares (m)         126.2  
Diluted earnings per share (Rs)         37.9  
Price to earnings ratio (x)*         17.8  
*based on trailing 12 months earnings

What has driven performance in 4QFY14?
  • Net sales grew by 12.3% YoY during the quarter led by growth in the formulations segment.

    Business mix
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Formulations 4,915 5,697 15.9% 20,723 24,170 16.6%
    (% of revenues) 74.6% 77.0%   75.7% 76.0%  
    Domestic 1,784 1,966 10.2% 8,781 9,694 10.4%
    Export 3,131 3,731 19.2% 11,942 14,476 21.2%
    API 1,672 1,701 1.7% 6,665 7,648 14.7%
    (% of revenues) 25.4% 23.0%   24.3% 24.0%  
    Domestic 376 365 -2.8% 1,446 1,645 13.8%
    Export 1,296 1,335 3.0% 5,219 6,002 15.0%
    Total 6,587 7,398 12.3% 27,388 31,818 16.2%

  • Domestic formulations grew by 10% YoY during the quarter. The sales for the quarter got impacted due to disruptions in the trade channels. However, these issues have been resolved now. Recently, the drug price control order (DPCO) allowed companies to increase the price of drugs by approximately 6%. However, this benefit will be neutralized due to higher margins given to the trade channels. For FY15, company has remained confident of achieving growth in the range of 16-18%.

  • Export formulations witnessed good growth of 19.2% YoY for 4QFY14. During the quarter, the generic segment grew by 11.3% YoY, while the branded business grew by 17.9% YoY. One should note that the company generates generic revenues from developed markets while most of the branded business comes from developing countries like CIS and Africa. Capacity constraints in the US market impacted sales of the generic segment. Other major geographies witnessed healthy growth. The company witnessed good growth in the institutional business, which comprises supply of anti malaria drugs in the developing countries. For Ipca, the institutional business is an important growth driver. During the quarter, this segment witnessed healthy growth of 31% YoY. Company is also working towards launching injectable of Artemether-Lumefantrine and expects to launch this drug in FY16. Ipca has guided for sales potential of Rs 7 bn from the institutional business by FY18 and this injectable will contribute approximately 20% to total sales. Ipca also expects to benefit from the tender filed for AMFm (Affordable medicines facility malaria). One should note that AMFm is changing its procurement arrangements. Now around 40% of the requirement will be procured through tenders.

  • The API segment witnessed muted growth of 2% YoY for the quarter. Large part of API was used for captive consumption.

  • Operating margins improved by 2.8% largely due to better product mix. Better gross margins boosted the company’s overall operating margins. One should also note that the company has also increased its expenses on research and development. Inspite of this, the company witnessed margin improvement. For FY15, the company has guided for EBITDA margins of around 24%.

  • Bottomline increased by 81.7% YoY during 4QFY14 on the back of decline in taxes, sharp increase in other income and higher forex gains. For FY15, company has given tax guidance of 24-25%.
What to expect?
At the current price of Rs 711, the stock is trading at a price to earnings multiple of 11.2 times our estimated FY16 earnings. Ipca’s growth is expected to be robust going forward and will be driven by both the generic and branded business. The company’s margins will also expand on the back of higher contribution coming from high margin formulations business. Company’s vertical integration for procurement of API too will boost margin growth. 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. Based on current valuations, we recommend investors to 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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