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Branded generics at play; risk-reward favorable

Some hiccups expected in the CIS/API/UK businesses over near term

We believe IPCA can deliver mid-teens earnings CAGR over the next two years (v/s YoY earnings decline in FY22), fueled by branded generics in the domestic formulation (DF)/exports segments and capacity addition in API.

Technically superior molecules backed by enhanced marketing efforts stand IPCA in good stead in the DF segment.

However, the company faces headwinds in its CIS business (3.5% of sales for 9MFY22) along with slower off-take in the API/UK businesses.

Accordingly, we have cut our FY23E/FY24E earnings by 8%/6%, respectively, and value IPCA at 24x 12M forward earnings to arrive at our TP of INR1,200.

We believe its current valuation adequately factors in the downside in earnings; maintain BUY. Our TP implies 18% potential upside from the current level.

Key risks to our call: 1) Prolonged delay in product approvals, 2) lower-thanexpected traction in DF, and 3) adverse regulatory measures at industry levels for APIs on account of impurities.

DF on a strong footing

IPCA has delivered 12% sales CAGR in the DF segment v/s India Pharma market (IPM)’s growth of 7% over FY18-21, with 26% YoY growth in 9MFY22. Almost 68% of the growth was led by volume, 20% by price and the remaining by new launches for 12M ending Feb’22. The shift in doctors’ inclination towards prescribing Aceclofenac (than diclofenac) along with IPCA’s superior marketing efforts is primarily fortifying its ZERODOL brand (26% of DF sales as per AIOCD) and its combinations.

Even Chlorthalidone has witnessed high-teens growth over the past two years with better hypertension control during the night, driving superior performance of CTD and its combination brands (5% of DF sales as per AIOCD) for IPCA. SAAZ and GLYCINORM are the other interesting brands in IPCA’s portfolio with annualized sales of INR500m+ (according to AIOCD).

Further, an inflation-linked price hike of 10% for the portfolio under National List of Essential Medicines (NLEM) would be an additional booster over the medium term.

Overall, we expect 14% sales CAGR in DF over FY22-24 to INR32b, for IPCA.

CIS business at risk due to the ongoing geopolitical crisis

IPCA had about INR2b of annualized sales in FY21 from the CIS geography. IPCA has reported 7% sales CAGR in this region over FY18-21 and CIS formed 3.5% of its sales in 9MFY22. However, the Ruble depreciation of ~50% would affect IPCA’s sales realization adversely, while it continues to incur operational cost for the same as well.

API/UK businesses to gradually pick-up over the near to medium term

The process of revalidation related to azido impurities for Losartan at industrial level had a toll on IPCA’s API business as well. Its API sales declined 13% YoY in 9MFY22. IPCA has revalidated the process and its product is within the required specification as far as the azido impurities are concerned. However, the regulatory re-filing by its customers and subsequent approval would take 3-5 months before its Losartan-related API business return to normalcy.

Changing the strategy towards own distribution in the UK market has led to resubmission of product filing under own label. Accordingly, IPCA has almost 40- 50 products in the pipeline for approval from the UK regulatory authority. The approval process and ensuing ramp-up of commercialization would enable IPCA to regain its business to INR3b over the next 1-2 years from INR1b currently.

Outlook positive backed by strong brand franchise and capacity additions

We have cut our FY23E/FY24E earnings by 8%/6%, respectively, for IPCA to factor in: a) the moderation in API business, b) slower off-take in the UK business and c) adverse macro situation in CIS countries. We value IPCA at 24x 12M forward earnings to arrive at our TP of INR1,200.

We expect 15% earnings CAGR for IPCA during FY22-24, driven by strong outperformance in the DF segment, improvement in the branded generics exports market and 120bp margin expansion.

We remain positive on IPCA backed by its strong brand franchise in DF and ongoing capacity addition initiatives to cater to the future demand in the API segment. Maintain BUY. Our TP implies 18% potential upside from current level.

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