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Ipca: Good start to the year - Views on News from Equitymaster

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Ipca: Good start to the year
Jul 30, 2013

Ipca has announced its 1QFY14 results. The company has reported 25.7% YoY growth in sales and 67% YoY growth in the bottomline. Here is our analysis of the results.

Performance summary
  • Topline grows by 25.7% YoY during the quarter led by growth in the formulations segment. Export formulations, particularly, witnesses robust growth of 47% YoY.
  • Operating margins decline by 1% due to increase in overall expenses. Inspite of this, operating profits grow by 20.6% YoY.
  • Bottomline grows by 67% YoY during 1QFY14 due to fall in interest expense and forex losses and increase in other income.

Financial performance: A snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 6,303 7,925 25.7%
other operating income 74 130 77.0%
Expenditure 4,958 6,345 28.0%
Operating profit (EBDITA) 1,418 1,710 20.6%
EBDITA margin (%) 22.2% 21.2%  
Other income 30 45 49.3%
Interest (net) 95 71 -25.0%
Depreciation 199 241 21.0%
Profit before tax 1,153 1,442 25.1%
Forex (gain)/loss 589 480 -18.5%
Tax 135 245 81.5%
Profit after tax/(loss) 430 718 67.0%
Net profit margin (%) 6.8% 9.1%  
No. of shares (m)   126.2  
Diluted earnings per share (Rs)   28.6  
Price to earnings ratio (x)*   23.5  
*based on trailing 12 months earnings
What has driven performance in 1QFY14?
  • Topline grew by 25.7% YoY during the quarter led by growth in the formulations segment.
    Business Mix
    (Rs m) 1QFY13 1QFY14 Change
    Formulations 4,487 5,803 29.3%
    (% of revenues) 71.2% 73.2%  
    Domestic 2,242 2,504 11.7%
    Export 2,245 3,300 47.0%
    API 1,816 2,122 16.9%
    (% of  revenues) 28.8% 26.8%  
    Domestic 393 456 16.0%
    Export 1,422 1,666 17.1%
    Total 6,303 7,925 25.7%

  • Domestic formulations grew by 12% YoY growth during the quarter. Company witnessed some slowdown in sales due to implementation of the new pricing policy and strike by stockists in Maharashtra. This had impacted revenues by approx 3% for the said quarter. The implementation of the new pricing policy is expected to impact revenues of Rs 220 m, however as the company is eligible for price increase in various drugs this impact will be nullified and hence the company will not have any impact due to pricing policy going forward. Ipca has increased price of some of its leading brands including Lariago. The current quarter's performance also reflected the impact of lower anti malaria sales, which grew by just 5%. The other segments viz., pain and cardiac grew by 20% and 10% respectively. For FY14, the company expects anti malaria to grow by 12% and overall domestic business by 16-18%. The current sales force of the company stands at 3,400 MRs. This is expected to remain the same.

  • Export formulations witnessed healthy growth of 47% YoY for 1QFY14. During the quarter, the generic segment witnessed increase of 43% YoY. Most of the geographies witnessed robust growth. In this, institutional sales grew by 40% YoY and generic segment by 45% YoY. All the geographies in the generic segment continued to witness healthy growth. UK, Australia and NZ grew above 40% during the quarter. However, US grew by 17% YoY due to capacity constraints. The company expects ramp up post the clearance of its Indore SEZ. The branded formulations witnessed healthy growth of 61%YoY to Rs 730 m for 1QFY14. Ipca expects branded formulations segment to witness approx 25-30% growth for FY14.

  • The API segment grew by 17% YoY for the quarter. Though the current performance might not be sustainable, the company expects exports API to witness growth of approx 10% for FY14. Exports API contribute approx 80% to total API sales.

  • Operating margins declined by 1%, due to increase in overall expenses. Large part of increase in expenses was pertaining to employee costs (the company had created provisions for future payment) and increase in R&D expenses by 82%. The company had spent approx Rs 320 m on research and development during the quarter.

  • Bottomline grewby 67% YoY during 1QFY14 due to fall in interest expense, increase in other income and fall in forex loss.

  • Currently, the company has debt of Rs 6.4 bn. The average cost of this debt is approx 4%.

Conference call highlights
  • Current ANDAs in US - Total 35 filed, 15 approved of which 8 are commercialized.
  • In the Institutional business, Strides has also entered the market. However, Ipca has not witnessed any impact due to Strides' entry. Company remained confident of robust growth from this segment. Ipca's Artimisinin drug has approx 30% market share. Ipca has a strong order book. In the next three years, the company expects this business to double to Rs 8 bn.

  • R&D expenses are expected to come down in 2HFY14. Company is working on a 505(b)2 drug indicated for cardiac disease. Currently, the drug is under clinical development. During the quarter, the company has spent approx Rs 130 m on this drug.

  • Company has incurred capex of Rs 470 m for the quarter and for FY14 the same has been pegged approx Rs 3-3.2 bn.

  • Outstanding hedges - US$ 67 m for 12 months at Rs 57.05.

  • Indore SEZ is awaiting USFDA clearance. Company expects the USFDA's response in the beginning of Aug or September. However, the major revenues from the facility will come from FY15 onwards.

What to expect?

At the current price of Rs 604, the stock is trading at a price to earnings multiple of 10 times our estimated FY16 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. The domestic business is also expected to ramp up further. 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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