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Ipca Labs: Profits take a hit

Aug 4, 2010

Ipca Labs has announced its 1QFY11 results. The company has reported 16% YoY growth in sales and 22% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grow by 16% YoY in 1QFY11 led by the robust performance of its domestic formulations business and APIs.
  • EBDITA margins contract by 3% during the quarter due to higher staff costs and other expenditure (as percentage of sales).
  • PAT declines by 22% YoY during the quarter due to fall in operating profits, higher depreciation charges and forex losses.

Standalone snapshot
(Rs m) 1QFY10 1QFY11 Change
Net sales 3,589 4,180 16.4%
Expenditure 2,871 3,468 20.8%
Operating profit (EBDITA) 719 712 -0.9%
EBDITA margin (%) 20.0% 17.0%  
Other income 41 6 -85.9%
Interest (net) 76 49 -36.2%
Depreciation 110 129 17.1%
Profit before tax 574 541 -5.7%
Forex loss/(gain) (62) 29  
Tax 138 123 -10.5%
Profit after tax/(loss) 498 388 -22.0%
Net profit margin (%) 13.9% 9.3%  
No. of shares (m) 25.2 25.0  
Diluted earnings per share (Rs)*   15.8  
Price to earnings ratio (x)   17.6  
* on trailing 12-months basis

What has driven performance in 1QFY11?
  • Ipca’s topline during the quarter grew by 16% YoY largely led by the domestic and export formulations businesses. While the domestic formulations business registered a growth of 16% YoY, export formulations grew by a robust 29% YoY. As a result, the overall formulations business recorded a healthy growth of 21% YoY. APIs, however, did not do too well during the quarter as sales from this segment grew by a mere 5% YoY. Domestic APIs sales declined by 5% YoY, whereas revenues from export APIs grew by 10% YoY. Decline in anti-malarial API sales in the domestic and export markets were responsible for the subdued performance of the API segment.

  • Ipca’s operating margins contracted by 3% during the quarter due to an increase in staff costs and other expenditure (as percentage of sales). Aggressive expansion of domestic field force and increase in marketing expenses led to the rise in staff costs and other expenditure.

  • Ipca’s bottomline fell by 22% YoY during the quarter. This was due to the shrinkage in operating margins, higher depreciation charges and forex losses during the quarter (as against forex gains in 1QFY10). Excluding the forex loss of Rs 29 m, the decline in net profits was lower at 4% YoY. Even a reduction in interest costs and tax expenses could not do much to arrest the dip in profits.

What to expect?
At the current price of Rs 279, the stock is trading at a multiple of 17.6 times its trailing 12 months 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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