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Ipca: Formulations witness poor growth - Views on News from Equitymaster

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Ipca: Formulations witness poor growth

Oct 24, 2013

Ipca has announced its 2QFY14 results. The company has reported 10% YoY growth in sales and an increase of 3.6% in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 10% YoY during the quarter led by growth in the API segment. Formulations segment witnesses muted growth.
  • Operating margins improve by 4.5% to 28.1% during 2QFY14 largely due to decrease in the cost of raw materials.
  • Bottomline increases by only 3.6% YoY during 2QFY14 despite healthy growth in operating profits. This is largely due to forex loss incurred during the quarter.

Financial performance: A snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 7,575 8,343 10.1% 13,878 16,268 17.2%
other operating income 106 124 17.7% 179 255 42.1%
Expenditure 5,894 6,122 3.9% 10,851 12,467 14.9%
Operating profit (EBDITA) 1,787 2,345 31.2% 3,206 4,056 26.5%
EBDITA margin (%) 23.3% 27.7%   22.8% 24.5%  
Other income 92 53 -41.8% 121  98 -19.4%
Interest (net) 89 57 -35.5% 184 129 -30.1%
Depreciation 209 252 20.8% 408 493 20.9%
Profit before tax 1,581 2,089 32.1% 2,735 3,532 29.1%
Forex (gain)/loss  (64) 399   525 879 67.5%
Tax 395 396 0.1% 530 641 20.8%
Profit after tax/(loss) 1,250 1,295 3.6% 1,681 2,013 19.7%
Net profit margin (%) 16.5% 15.5%   12.1% 12.4%  
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 2QFY14?
  • Topline grew by 10% YoY during the quarter led by growth in the API segment.

    Business Mix
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Formulations 6,019 6,388 6.1% 10,506 12,191 16.0%
    (% of revenues) 79% 77%   76% 75%  
    Domestic 2,628 2,762 5.1% 4,870 5,265 8.1%
    Export 3,392 3,626 6.9% 5,637 6,926 22.9%
    API 1,556 1,955 25.6% 3,371 4,077 20.9%
    (% of revenues) 21% 23%   24% 25%  
    Domestic 304 405 33.2% 697 861 23.5%
    Export 1,252 1,550 23.8% 2,674 3,216 20.3%
    Total 7,575 8,343 10.1% 13,878 16,268 17.2%

  • Domestic formulations grew by a muted 5% YoY during the quarter. This was largely attributable to (1) Lower malaria sales, which declined by 14% during the quarter leading to an impact of Rs 173 m on sales (2) Temporary ban on 'Piogliatazone' which hit domestic revenues by Rs 40 m during the quarter. However, according to the company, sales of this product are soon expected to get back on track (3) Disruptions at trade levels as they are asking for more margins on the back of implementation of the new pricing policy (4) Implementation of the pricing policy leading to the downward revision of the prices of drugs. However, as per the management, there are various drugs whose price can be revised upwards and that is expected to nullify the negative impact. During this quarter, the company was also able to revise the price of two drugs upwards. Ipca is awaiting more such upward revisions in the upcoming period. Except for anti-Malarials, other therapies witnessed good growth. The pain segment grew by 20%, Urology by 40%, Dermatology by 30% and other segments grew in the range of 10-18%. However, the Cardiac segment was hit due to lower 'Pioglitazone' sales. In the long run, the company expects sales to ramp up in this segment.

  • Export formulations witnessed muted growth of 7% YoY for 2QFY14. During the quarter, except the institutional biz other segments witnessed better growth. The sales of institutional business declined by 22% YoY, The sales in institutional business were impacted due to delay in shipments. However, company remained confident of achieving guided sales of Rs 4.5- Rs 5 bn from this segment for FY14. The company's Artemisinin drug is ramping up and it is confident of witnessing robust growth in this segment. The company is also developing the injectable of Artemisinin which will be the future growth driver for this segment. The branded formulations grew by 12% YoY to Rs 730 m for 2QFY14. Company expects branded formulations segment to witness approx 25-30% growth for FY14.

  • The API segment witnessed robust growth of 25.6% YoY for the quarter. Though the current performance might not be sustainable, company expects exports API to witness growth of approx 10% from FY14 as US sales will start ramping up.

  • One should note that inspite of higher contribution from the API segment, the overall operating margins improved by 4.4%. This was due to (1) Lower sales of anti-malarial drugs. By nature these drugs fetch quite low margins. (2) Rupee depreciation resulted in lower costs of raw materials (3) Better product mix i.e. sale of higher margin drugs. On the back of rupee depreciation, company expects the overall EBITDA margins to improve going forward if the rupee sustains at similar levels.

  • Bottomline increased by 3.6% YoY during 2QFY14. Despite better growth in operating profits, bottom line was impacted largely due to forex loss (large part is non-cash loss) incurred during the quarter as against a gain in 2QFY13.

    Key takeaways from the conference call

  • Company has revised its guidance upward to 20% topline growth and improvement of EBITDA margins by 2% for FY14.

  • Current ANDAs in the US - Total 36 filed, 15 approved of which 9 are commercialized.

  • The company's 505(b)2 drug trials are progressing well. The company expects approval to come in next 15 months. This will be an important launch for the company.

  • Company will continue to do capex of Rs 3-3.2 bn per annum. This will be largely utilized to increase capacity at its SEZ facility, develop new research centers and facilities for ophthalmic and hormones based drugs.

  • The company's current outstanding hedges stand at US$ 70 m. Of this, US$ 20 m are hedged at Rs 58 for FY14 and US$ 50 m are hedged at Rs 63 for FY15.

  • The approval of Indore SEZ is a positive for the company. The company expects this facility to generate revenue of Rs 100 m in FY15. Large part of sales will be supplied to the US market. Company expects approval of approx 6-7 products from this facility for the US.

What to expect?
At the current price of Rs 674, the stock is trading at a price to earnings multiple of 10.5 times our estimated FY16 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 the 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. We have revised our estimates on back of the revised guidance. 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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