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Strong earnings visibility
We recently hosted top management of IPCA Labs for investor meetings. Based on key takeaways, we believe business remains on track for steady 11-12% growth and consistent rise in margins driven by domestic formulations, traction in key export markets and better utilization of capacities due to increased revenues. Management, led by Mr. Ajit Jain, Joint MD and Mr. Harish Kamath, Company Secretary reiterated their guidance of 12-14% revenue growth and 150-200bps margin improvement in FY20. Company awaits US FDA inspection and is fully prepared for an audit across all three plants; notably, guidance does not include any upside from US operations which can start in due course after clearance.
Management indicated that residual remediation costs of Rs80-100mn would be recurring while large part of the remedial costs of Rs500- 600mn have already been accounted in FY19. Domestic business can clock 1.5x the market growth driven by higher penetration and large headroom especially in pain management; importantly, growth will accrue from increased productivity and company is not looking at substantial MR hiring in the current fiscal. Though pharma market has seen volume slowdown especially in May 2019, company believes underlying trends responsible for 8-10% IPM growth have not changed. In export markets, IPCA benefits from deep backward integration, which renders it one of the lowest cost producers of formulations. Institutional business is on a revival path as company expects Rs2.5bn in sales compared to Rs1.6bn in FY19, supported by Global Fund orders as also first Africa injectable orders currently under execution.
IPCA has fortified US operations with acquisition of Bayshore which is a pure generics distributor. UK distributor business issues have now been resolved and company expects overall generics business to grow 10-11% in FY20. Ramdev Chemicals brings an FDA approved site and has filed some dossiers in Europe and has products on pain and other advanced intermediates. Overall, we like IPCA’s domestic focus reinforced by lack of US volatility; BUY stays based on 21x FY21E, at a premium to sector valuations, on back of robust earnings visibility.
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