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Ipca: US business to come under pressure - Views on News from Equitymaster

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Ipca: US business to come under pressure
Aug 8, 2014

Ipca has announced its 1QFY15 results. The company has reported 16.7% YoY growth in sales and an increase of 102.7% on the bottomline. Here is our analysis of the results.

Performance summary
  • Topline grows by 16.7% YoY during the quarter led by growth in API and formulations.
  • Operating margins improve by 3.5% largely due to decrease in cost of raw materials.
  • Bottomline surges by 102.7% due to forex gain during the quarter vs. forex loss in 1QFY14.
Financial performance: A snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 7,953 9,282 16.7%
other operating income 102 78 -24.1%
Expenditure 6,346 7,050 11.1%
Operating profit (EBDITA) 1,710 2,309 35.0%
EBDITA margin (%) 21.2% 24.7%  
Other income 45 63 41.3%
Interest (net) 71 57 -19.8%
Depreciation 241 379 57.2%
Profit before tax 1,442 1,936 34.2%
Forex (gain)/loss 480 (23)  
Tax 245 504 105.5%
Profit after tax/(loss) 718 1,455 102.7%
Net profit margin (%) 9.0% 15.7%  
No. of shares (m)   126.2  
Diluted earnings per share (Rs)   28.9  
Price to earnings ratio (x)*   23.3  
*based on trailing 12 months earnings

What has driven performance in 1QFY15?
  • Topline grew by 16.7% YoY during the quarter led by growth in formulations and API segment.

    Business Mix
    (Rs m) 1QFY14 1QFY15 Change
    Formulations 5,831 6,809 16.8%
    (% of revenues) 73% 73%  
    Domestic 2,503 2,931 17.1%
    Export 3,328 3,877 16.5%
    API 2,122 2,473 16.5%
    (% of revenues) 27% 27%  
    Domestic 456 641 40.6%
    Export 1,666 1,831 9.9%
    Total 7,953 9,282 16.7%

  • Domestic formulations business grew by 16.8% YoY during the quarter. Growth in this segment was led by growth in Pain & RA (grew by 21% YoY), CVS (grew by 16% YoY), anti-diabetes (grew by 9% YoY) and anti-malaria (grew by 15% YoY). The exports formulations grew by 16.5% YoY, led by institutional and branded business. The generic business witnessed some pressures on the back of temporary shutdown in the production facility. This had impacted European sales.

  • The EBITDA margins were up by 3.4% YoY to 24.7%, due to lower cost of raw materials. The favorable product mix has helped the company to realize better sales.

  • Bottomline surged by 102.7% due to forex gain during the quarter vs. forex loss in 1QFY14. Excluding forex, profits were up by 19.6% YoY.

    Update on 483 issued on company's facility

    Post the recent USFDA inspection at IPCA's API facility at Ratlam (Madhya Pradesh), some 483s were issued. On the back of which the company has voluntarily decided to temporarily suspend shipments from this facility for the US markets. The company expects that it will take approximately six months to resolve these issues and then it will resume the sales.

    The temporary suspension of supply will impact the growth prospects of the company in the US market. As per the management, following will be impact due to this temporary shutdown:


    • The company has one month of inventory at the facility and also some inventory lying in the US with the clients. Thus, this will lower the impact to that extent.

    • As per the management, the revenues that would likely get impacted in FY15 are Rs 1.5 bn in the US.

    • The margins from the US business are approximately 28%, these margins are more than the overall business. Other than this, the plant incurs fixed costs of Rs 500 m per annum. This will impact the company's margins.

    As the actions from the USFDA cannot be predicted, we maintain a cautious stance on this event. Though the management remained positive on the situation getting resolved in six months, we would wait for more actions from the company and USFDA on this front.
What to expect?
At the current price of Rs 696, the stock is trading at a price to earnings multiple of 10.9 times our estimated FY17 earnings. Ipca has various growth drivers in the upcoming period. Thus growth is expected to be robust going forward. The company's margins will also expand on back of higher contribution coming from high margin formulations business. 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.

While Ipca has been transparent and a company having good corporate governance, the recent negative development with respect to its manufacturing facility for the US will impact the company's overall business. Thus, we maintain a cautious view and recommend investors not to Buy the stock at current levels. Those who have Ipca in their portfolio 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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