Remediation work complete
Looking forward to USFDA inspection
We visited IPCA Laboratories’ (IPCA) API site at Ratlam, Madhya Pradesh to understand the remediation work done by the management ahead of USFDA inspection. The invite has been sent to USFDA in February 2018, which implies the company has completed remediation measures to resolve import alert/warning letter issued by USFDA. The company has also sent invites for its formulation units in October 2017 (Indore SEZ) and June 2017 (Piparia), thus covering all the sites under import alert/warning letter.
* Multiple customer and regulatory audits provide confidence to face USFDA inspection:
IPCA has faced about 250 customer audits for regulated as well as non-regulated markets in the last two years. It has also cleared inspections by regulatory agencies like WHO-Geneva, German regulatory agency, Russian regulatory agency, PMDA-Japan and health Canada. There are no issues outstanding for any regulatory agency other than USFDA. Inspection by USFDA is not scheduled yet. IPCA has brought significant changes in terms of automation, culture, quality control/quality assurance, documentation, and training to make its facilities USFDA compliant.
* Anti-malaria business to revive in FY19:
Though Global Fund has completed the process of selection for supplying anti-malaria medicines, it is yet to award orders. However, ex-Global Fund, stable business continues. IPCA has guided revenue of INR2b in FY19, up from INR1.5b in FY18 on the back of addition of molecules and incremental business from Global Fund.
* Other updates:
IPCA is awaiting resolution of regulatory issues of UK distributor to restore normalcy in that business. It has guided that it would take 2-3 months for pick-up in UK business (~7% of FY18 sales). DF remains on track to achieve 13-14% growth in FY19 on low base of FY18, incremental sales from new molecules and higher traction in existing molecules.
* Valuation and view:
We have assumed strong 13.5%/44% CAGR in sales and PAT over FY18-20. We raise our target P/E multiple to 21x (from 20x earlier) on back of enhanced visibility of regulatory resolution based on remediation work done by the company, revival in DF and anti-malaria business. Accordingly, we value IPCA at 21x FY20E EPS of INR39 to arrive at a price target of INR825 (v/s INR785; 20x FY20E EPS earlier). Reiterate Buy
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