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Progressing steadily to reclaim the growth path

* We met with the management of IPCA recently to understand its business outlook.

* Domestic formulation (DF) is the key driver of its sales growth, fueled by market outperformance in pain/dermatology/urology and supported by higher MR base.

* Notwithstanding the near-term hiccups in API segment, IPCA is building levers to almost double its API exports by FY27E.

* The exports (branded/generics) formulation sales is likely to revive from FY24.

* We have reduced our earnings estimate for FY23/FY24 by 4%/3% to factor in increased opex on the back of promotional activities and logistics cost. After two years of earnings decline, we expect IPCA to clock 33% earnings CAGR over FY23- 25. We continue to value the stock at 24x 12-month forward earnings to arrive at our TP of INR1,000. Maintain BUY.

DF segment outperforming the overall market

* Management expects the DF business to grow at 22-23% YoY (adj. for higher base of FY22) in FY23, propelled by growth across all therapies – mainly Pain management, Anti-diabetes, Dermatology and Urology.

* The efforts are on track to generate INR10b annual sales from Zerodol brand franchise through increased MR force and wider doctor reach. This along with superior traction in other brands such as Pacimol/Tfct Nib would sustain better-than-industry growth in pain management.

* The enhanced focus on the cosmetics aspects in dermatology would drive 25% YoY growth for IPCA v/s industry growth of 9-10% over the next 12-18 months.

* IPCA’s MR strength has been stable at ~4,000-4,600 since FY17, implying improved MR productivity with 13% sales CAGR over FY17-22. However, the company added ~1,200 MRs over 1HFY23 due to which its MR productivity ebbed a bit. Management though continues to focus on raising the productivity.

* Overall, IPCA is likely to exhibit 15% YoY sales growth in FY24

API/exports formulation – work in progress to revive growth

* After three years of strong 30% sales CAGR, the API segment witnessed 11%/12% YoY decline in FY22/1HFY23, respectively, led by heightened competition in sartans and high HCQS base.

* With addition of Dewas facility, better business from existing customers and product additions, the management projects to ramp-up API export sales to INR20b by FY27 v/s the current annual sales of INR10b.

* With a target of 50-55 products (7-8 already under distribution; 12-15 awaiting approvals), IPCA is expected to revive the UK business to INR2.5bINR3b over the next three years v/s INR290m in 1HFY23.

* The branded exports formulation business is recovering gradually with favorable macro environment and is likely to grow 10-12% YoY in FY24

Valuation and view

* We expect 33% earning CAGR over FY23-25, led by 17%/16%/11% sales CAGR in the India/API/exports (generics/branded) segment, respectively, along with 480bp EBITDA margin expansion. We value IPCA at 24x 12-months forward earnings to arrive at our TP of INR1,000.

* We remain positive on IPCA backed by superior execution leading to a) brand led growth in DF, b) product pipeline/cost minimization in API segment and gradual recovery in exports. Maintain BUY with upside of 18% from current levels.

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