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Our meeting with Mr. Ajit Jain, Jt. MD and Mr. Harish Kamath, CS, provided insights into IPCA’s margin recovery, domestic growth and API outlook. IPCA’s 1500 MR addition (breakeven in FY25) will increase coverage and strengthen domestic growth. Pain therapy (49% of domestic) will continue to grow at 17-18% led by Zerodol franchise while other therapies will also grow faster than their respective markets. Cardio-diabetes has reverted to double digit growth recently and is expected to sustain. NLEM price revisions will have ~3% net impact primarily in 4Q/1Q24. The management aspires to double API business over 5 years. While the scope to grow the institutional business is limited, UK business and branded business will drive healthy double digit growth in export formulations. The management expects 3-4 ppt improvement in margins in FY24 with 100bps improvement every year thereafter. We believe IPCA’s margins have bottomed out in FY23 and is poised for a strong recovery in FY24 due to: (1) Higher domestic growth (15-16%) as MR productivity increases; (2) Improvement in gross margins by 1-1.5 ppt as inflation eases; (3) UK business recovery; (4) impurity related incremental costs in the base; and (5) Dewas contribution. We adjust our earnings by 3-5% to factor a gradual GM improvement. We roll forward to FY25 earnings to derive a Mar’24 Price target of INR 1115. Maintain BUY.

* Zerodol franchise and pain therapy: Zerodol constitutes 30%+ of domestic business (INR 10bn top-line) and will continue to grow at 18-20% as pain therapy itself is growing and Aceclofenac is gaining market share from other molecules. IPCA’s nearest competitor has INR 2bn revenue. There are 100+ branded generics in the market. Pain therapy, which constitutes 49-50% of domestic business, will grow at 17-18%. IPCA is planning to launch Zerodol spray and a post-surgery anti-inflammatory drug in the near future. The management has identified enzymes as the existing gap in pain therapy which will be added soon. In Rheumatoid Arthritis (RA), IPCA is the leader. However, diagnosis of this therapy remains an on-going challenge which the management is trying to address by creating doctor awareness, increasing MR etc. This segment has c. INR 5bn sales

* Cardio-diabetes and other therapies: Management alluded to sluggish market growth which was largely driven by inventory correction and reduction of patient pool amid the pandemic. IPCA’s cardiologist coverage has significantly increased over the past few years and is expected to drive faster than market growth going ahead. It has launched sacubitril valsartan and aims to reach INR 180mn pa exit rate. IPCA is gearing up for a novel drug launch in FY24 (in-licensed) on which the innovator (indigenous) has spent INR 2.5bn. This repurposed drug will be used for wound closure in diabetes patients and is likely to be expanded to all wound closures over time. In Derma, the management plans to enter overcrowded segments such as steroids and anti-fungal after achieving stellar success in less focused cosmetic-derma space. The other key therapies that IPCA wants to focus on are Gynaecology and Stomatology.

* MR addition: IPCA has largely completed their 1500 MR addition (total now ~7000 MRs). 350 MRs will be added in Zerodol, 250 MRs in Cardiac, 350 MRs in RA and they have also created a new derma division. The pcpm excluding new addition is 4.5L (Zerodol division has 10-12L) and the new MR addition will break-even by FY25. The attrition rate remains at 15%.

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