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Ipca: Hit by US FDA issues - Views on News from Equitymaster
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Ipca: Hit by US FDA issues
Nov 12, 2014

Ipca has announced its 2QFY15 results. The company has reported a decline of 7.6% YoY in its sales and a fall of 53% YoY in the bottomline. Here is our analysis of the results.

Performance summary
  • Net sales declined by 7.6% YoY during the quarter due to fall in exports revenues.
  • Operating margins too witnessed sharp fall by 10.4%, as operating profits fell by 43% YoY.
  • On the back of poor performance at the operating level, bottom line plummeted by 52.6% YoY.

Financial performance: A snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 8,389 7,749 -7.6% 16,342 17,031 4.2%
other operating income 78 57 -26.4% 180 135  
Expenditure 6,122 6,458 5.5% 12,467 13,509 8.4%
Operating profit (EBDITA) 2,345 1,348 -42.5% 4,056 3,657 -9.8%
EBDITA margin (%) 27.7% 17.3%   24.5% 21.3%  
Other income 53 87 63.4% 98 150 53.4%
Interest (net) 57 57 0.2% 129 115 -10.9%
Depreciation 252 396 57.1% 493 775 57.1%
Profit before tax 2,089 981 -53.0% 3,531 2,917 -17.4%
Forex (gain)/loss 399 94   878 71  
Tax 396 275 -30.5% 641 778 21.5%
Profit after tax/(loss) 1,295 613 -52.6% 2,013 2,068 2.7%
Net profit margin (%) 15.4% 7.9%   12.3% 12.1%  
No. of shares (m)         126.2  
Diluted earnings per share (Rs)         38.3  
Price to earnings ratio (x)*         17.4  
* On a trailing 12-months basis

What has driven performance in 2QFY15?

  • Topline (including other operating income) declined by 7.8% YoY. Both formulations and API exports declined during the quarter

    Business Mix
    (Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
     
    Formulations 6,435 6,341 -1.4% 12,265 13,150 7.2%
    (% of revenues) 77% 82%   75% 77%  
    Domestic 2,762 3,279 18.7% 5,265 6,211 18.0%
    Export 3,673 3,062 -16.6% 7,000 6,940 -0.9%
    API 1,955 1,407 -28.0% 4,077 3,880 -4.8%
    (% of revenues) 23% 18%   25% 23%  
    Domestic 405 445 10.0% 861 1,087 26.2%
    Export 1,550 962 -37.9% 3,216 2,794 -13.1%
    Total 8,389 7,749 -7.6% 16,342 17,030 4.2%

  • Domestic formulations business grew at a decent pace of 18.7% YoY during the quarter. In the other international markets, the company witnessed lower growth in the US and other segments. While the sales in US were impacted due to shutdown of Ratlam facility, the sales from its institutional business also witnessed sharp fall of approx 45% during the quarter. This was because WHO asked Ipca to undergo 100% batch testing. This is in contrast with earlier process, since the company was facing regulatory challenges. This delayed the supply for the quarter and company lost sales of approximately 1.5 months.

  • Due to overall pressure on the sales, the EBITDA margins were impacted. The operating margins declined to 17.3% this quarter from 27.7% in 2QFY14.

  • Led by the poor performance at the operating level, net profits declined by 53% YoY during the quarter.

Even Indore SEZ receives 483s

Post the recent USFDA inspection at IPCA's Indore facility, some 483s were issued. As per the management, these issues are not as serious as the ones in the Ratlam facility. The management is working to address these issues and has already sent its responses to the USFDA. While the USFDA is expected to respond by December, the company will be able to give more clarity in this regard in the second half of this fiscal.

What to expect?
At the current price of Rs 666, the stock is trading at a price to earnings multiple of 10.5 times our estimated FY17 earnings. We are in the process of revising our estimates on the back of revised guidance given by the company. While Ipca is among the few fundamentally strong companies with good corporate governance, the recent events have impacted the company’s performance and the stock price. The growth and margins will get impacted.

Overall our view is that 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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